EUR Continues To Rally As Risk On Prevails

Very good morning to you. It is Friday, 5th of June. Hope you're doing well. First things first, don't forget to like and subscribe to Amplify Trading YouTube channel. Just as a reminder, on the channel you've got different playlists. You've got the briefings that I deliver Monday through Friday ahead of the European market open. Where I give you a global macro kind of overview across assets. Then you've got Sam's weekly trading setup. So as per usual, he'll be giving his full look ahead in terms of key technical levels and setups that he's looking at for the forthcoming week. That'll be delivered on Sunday afternoon. And you've got Eddie with his explainer series, and this Saturday he's going to be doing a special video. Lots of questions this week. I did address it a little bit, but he'll get into more details about I guess, why is the stock market rallying? A common question, I guess, for the normal consumer as well as the trader. So Eddie's going to deliver that and release that video on Saturday, tomorrow morning. So let's get straight into the briefing and let's talk about markets for this morning. And really, I want to, want to share a stage with these two individuals who have really stepped it up this week and, and created an extension of Gains in the euro currency, euro-dollar actually climbing for a 9th day yesterday, and it's moving higher again this morning. That is in fact the longest streak since 2011 for the euro currency. And why are these two particularly important? Well, Christine Lagarde, you recognize from yesterday, she over-delivered on that pandemic emergency purchase program, the PEPP, by €100 billion. Caught a few by surprise. She also said that they extended those purchases at least to the end of the summer, basically June of 2021, so another 12 months. And all of this looking to offset a deflationary spiral, of course, given the dramatic impact of COVID-19. Similarly, Angela Merkel, the German chancellor, coming through this week. And, you know, we started the week with a day of kind of impasse in German politics of whether or not they could come together and get a deal over the line of a secondary stimulus package, but she came in and, and she over-delivered. You know, the range was for €80 to €100 billion, and she managed to come together and put forward a plan for €130 billion. So the two forces combined have been a powerful cocktail for the euro currency, and I really wanted to kick things off and start with the euro. First of all, you can see here This was some of the euro initial price activity around the ECB rate decision. Then we broke higher going in towards the latter part of the afternoon. But the main thing I wanted to look at here was on a, was on a much longer time frame. And we're going to look at this as the same chart that we were looking at on Monday's briefing, if you remember. So let me just remove my camera feed so you can see everything a little bit more clearly. So there you go. So you remember on Monday I had this chart up and I had this trend line in focus, and that trend line coinciding with an important technical level around the 115 level, which was the resistance points that we had in March, uh, and also, and around June of 2019. It had also been there of resistance through 2015-16 and support through parts of 2018. And this was the level of which Deutsche Bank analysts were looking at. If you remember, they were saying that a combination of the general interventions from fiscal and monetary forces helping support then the idea of the economic recovery in the eurozone, coupled with then the general unwinding of the risk premium built into the dollar during COVID-19. And generally what that's meant then is EURUSD has been rising, as I said, consecutively for many sessions. The red line here is the 200 DMA, of which, as you can see here on the— I'm looking at weekly continuation candlesticks at the moment. We are right at around that level right now and testing on that trend line. So really quite important now where we're at at the moment. There still seemingly is still quite a lot of reading through some of the bank commentary, even talking to some of our traders like Alex, for example, who pretty much just focuses exclusively on the euro. He still remains pretty bullish. And in fact, I mean, he's got some pretty punchy targets looking for not just a break above this type of area or the 115, looking for a much bigger move to the upside over the, the multi-month kind of view. I guess a lot of that comes with some associated risk, developments on the trade war, the ability or not to control the potential for a secondary wave and how significant or not that is. Do we see a return of some risk trade which then restrengthens the dollar? They would be counter kind of risks to this overall trend. But at the moment, all things being equal, you'd have to be of a more bullish mindset. And certainly if we can technically get above some of these levels, then if we do get hit through where we are, where we are at, at the moment, I don't really see much in a way to then retest at that 115 handle, uh, in the near term. So just a quick look at the ECB, and, and obviously, as I said, you know, they over-delivered. That's kind of the bottom line. Peripheral bond yields then falling after the ECB expansion, as you would imagine. Yields in the 10-year in Spain, Portugal, and Italy declining. That then resulting in the spread between the Italian BTP and the German Bund tightening, as you can see here, by percentage points, moving from around 1.95 down to 1.75 on the back of that announcement. The reasoning then behind this chiefly has been because the ECB want to offset this potential for a kind of deflationary spiral. And inflation, as you can see here from the Eurosystem Staff Macroeconomic Projections, um, so these are, were last delivered in March. The update comes in June for their forward-looking kind of guidance on these two major economic metrics. And for inflation, as you can see, you know, they do see it, um, dipping considerably this year, down to the point of 0.3%. So it's— in actuality, it's going to remain so far away from target that it requires this type of more expansive effort to try and lift that, as well as other ways and means of which increases the PEPP will support the economy. Economic growth as well, you can see, remember when I was talking about the preview yesterday, they had these kind of more soft, moderate, and then severe case scenarios for growth. And certainly this sat between the more moderate to severe end of the spectrum, and -8.7% is a far removed expectation now for this year from where we were just a few months ago. And obviously, you know, you can't really— I don't think that's too surprising because at the end of the day when they issued these, they had very lack of visibility about the overall impact of COVID-19. It was still very early at that point, so this isn't massively surprising, but just goes to show the shape of change that we've been through, I think, over the last 3 months. And as you can see here, they're looking for a real powerful recovery going through then into 2021 before then stabilizing with inflation then gradually picking up in step with that. So that was the general ECB story, uh, and overall with markets this morning— let me just switch my feedback on— we still have relative risk-on sentiment. The DAX equally so, quite volatile initially. The DAX popped higher and did run into a degree of resistance into the prior day's high. However, then it came all the way back down as when she started to— the press conference, it looked a little bit uncertain whether or not then this is it, you know, now that they've delivered this, there's nothing more coming. And equities look to come under a little bit of pressure. We bounced off that trend line that had been in play over the short term, the last 48 hours, quite nicely. And that coincided with those previous highs. As you can see, that was kind of an area of resistance and support. This goes back to really the beginning of the week, midweek. And then that, in combination with that trend line, was quite a nice technical point where the market responded, magnitude to move up. And really the move here has come in the overnight Asia-Pacific session. And now importantly, we've broken above these two, that kind of double top on what would have been Wednesday's price action and the ECB spike high initially. And so the DAX pushing on now, up about 170 on the session. General risk appetite overnight in the Asia-Pacific session following through from what we had from, from yesterday. And yeah, S&P futures positive. Gold then down a fairly significant amount already, down $14 and sub its pivot level. T-notes down 5 ticks. And in the FX markets, the dollar continues to react in a kind of risk sentiment type way, and the DXY is down about 2/10. So both major currency pairs continue to move higher. Euro extension above the kind of double top that we've had printed, or 3 tests at around that level, yeah, late yesterday afternoon and into the US session. And you can see again technically just using that as a bit of a springboard for then a support area this morning for then this next push up. You can see that, that low there that we've just printed as Europe is coming to the marketplace. Sterling currency obviously just benefiting, if anything, just from the prevailing moves elsewhere in the currency markets. If the euro really is powering ahead, obviously when you think about the dollar basket, the euro is the biggest proportion proportion of that. And so strength there is by default weakening the dollar with that risk unwind, and, and kind of sterling getting a bit of a kick on the back of that. Interestingly, when you talk about the pound, you know, I was just reading the headlines this morning, and obviously this is something Eddie can go into tomorrow, because I think if you're not, if you're not operating within financial markets, it can be a little bit confusing. You know, you look at cable and it's just rallying at the moment, But if you read mainstream media, I'll give you a flavor of some of the headlines from this morning. UK consumer confidence touches a new decade low as COVID hits the economy, according to GfK. We've had this week the biggest fall in US or UK house prices in a decade. UK labor market sharp slide continues into May, according to REC, the Recruitment Employment Confederation. And then UK retail sales dive nearly 20% in May As the lockdown bites, according to BDO. So, you know, it is pretty depressing reading. And I guess as a consumer, um, not really aware of what— how markets operate, um, no surprise then that consumer confidence is getting impacted significantly at the moment when you're getting exposed to this kind of, um, this type of information. But from a market's perspective, obviously this is all priced in. This is all absolutely as expected. You know, what else was going to happen? I mean, on the back of the severity of what an entire and stringent lockdown on the economy was going to be, and that was predominantly what shook markets in March. And now that we've had such an immeasurable response from central banks and governments, and the UK being included, in both the Bank of England and the UK government, that we're forward-looking. And for now, you know, despite all of this economic doom and gloom, this disconnect between Main Street and Wall Street, the gulf between them is getting wide, ever wider at this point. Obviously, Eddie can touch upon, well, at some point, does reality then start to kick in? And, um, you know, these asset prices are so inflated by these other mechanisms that it's kind of doomed to fail at some point. The bubble bursts. But at the moment, I don't really see that happening anytime soon. So yeah, hopefully that makes a bit more sense if you, if you are new to markets, in, in terms of an explanation of, of how markets react rather than the actual true economy and its figures and how it's performing at the moment. Going back to the news then, the other thing I wanted to talk about briefly here was OPEC. Lots of comments. If you actually look at oil this morning, oil is actually tracking a little bit higher. So if you think about it from a fundamental point of view, this overall European story or narrative we've had this week from both the governments and the central bank— don't forget, the, you know, the single market is a massive proportion of the global economy because it's not talking about one a particular country, we're talking about an entire area. And so that's somewhat relief, the fact that they have come together. You know, it comes also with that more coordinated European-wide recovery fund that they did last week as well, and that's going to help on the demand side to a certain degree when it comes to the overall balance of views for the global economy. So that certainly helps. And then with OPEC+, then they've got a tentative deal basically. Although it's never over until the fat lady sings when it comes to OPEC, for the moment they've got a tentative deal with Iraq on compliance with their quotas. This is one of the things yesterday they were talking about, is kind of Russia and Saudi seem to be seeing eye to eye, but the Saudis in particular, due to the nature of which they are always picking up the slack for uncompliant nations, and particularly ones like Iraq and definitely more problematic when you're picking up Iraq's tab because they are significantly larger producers than other countries like Libya, Nigeria, Angola, Kazakhstan, these types of people, for example. And so what they're saying is we want them to fall into line better first, and then we'll look to take some more meaningful action. And what they're talking about here— Russian press has been talking that The alliance will hold a ministerial meeting actually tomorrow, so it could be— I'll be over the weekend. I'll write my normal macro menu if there is updates to be aware of, and it is a news story you'll need to track over the weekend. I'll, I'll cover it on Sunday ahead of the market open. You'll be able to access that on my, my Twitter account if you follow me. Um, the other 3 nations that I just mentioned— Angola, Kazakhstan, Nigeria— they all produced above their OPEC+ quota, so they were also uncompliant in the month May. Uh, the three though have said and agreed to bring their production in line with the agreement, but again, yet to be seen. OPEC+, they are going to be holding a technical, uh, committee. This is what they call the JMMC in terms of some of the market jargon that you hear. That basically just means it's the, um, technical committee and the Joint Ministerial Monitoring Committee, uh, and they're set to meet in the middle of the month, June 17th, 18th. This is basically when they come around, do the spot checks, make sure that compliance levels are indeed being met. One of the things though, I would say there's quite significant risk here in my mind about where this is at the moment. Obviously markets are reacting in a somewhat positive fashion, they have progressed, they've got a tentative deal, but the deal is, as I said, contingent on Iraq compliance. And therein lies the problem in my mind. And Bloomberg had a couple of good graphics So here you've got several of OPEC countries failed to implement full the output cuts they agreed to take in May. So here are some of the culprits, if you like, of that. And as you can see here, what you're looking at is the black bar would be the target, what they had agreed upon that historic meeting that we had just around a month ago or so with this coordinated OPEC+ and G20 oil-producing nations to comply in order to get away from this increasingly low price of oil that we had seen. And so the black bar is the target, the pink is the actual, and as you can see, Iraq is massively off what their target was, which was basically a million they needed to cut, and they cut— they, they cut about 300,000. Um, the other country is also a way off that. Nigeria has always been highly uncompliant, because generally before, in initial phases of the OPEC deal, they had been given a pass alongside Libya, chiefly down to the civil disruption that they've been seeing in their countries. So lo and behold, what do those countries do? They try to pump as much as possible, and seemingly Nigeria is still not moving too far away from that at the moment. But if you look at Iraq in a bit more detail, this is looking at each Even if the cuts begin to taper in August, Iraq would have to cut output by more than 1.3 million barrels a day from its April level, is what this is looking at. And so, uh, the cut made towards meeting the target, uh, these are the cuts not made, and now they've got to compensate with an additional deeper cut. Basically what the Saudis are saying is, look, you were uncompliant before. You've got to cut even more now. So not only were they uncompliant in the first place, now you're asking them to cut even further than they couldn't even achieve in the first place. In my mind, that is a disaster in waiting. I do not see Iraq being compliant to what Saudis are requesting at this moment. Now, is that, is that the silver bullet then that means the whole deal collapses? I don't actually think so. At the end of the day, if you think about it strategically from Saudi's point of view, they just want countries to be a little bit more compliant, a little bit more compliant than they are, a little bit less than the Saudi need to go to overdeliver, because every point of which they overdeliver, they're selling less oil and making less money. So at this point, it's just, it's just kind of being a little bit more strict. If you like. But I do think then that my main kind of final summary to this explanation is that, look, it ain't over till it's over with OPEC. And I think this week's been a good one for some of our new traders about just getting used to the type of volatility, the miscommunication, the misdirection that you get from OPEC. It is about as far and removed from central banking communication tactics and strategy as you're going to get. So yeah, expect the unexpected, plan accordingly, uh, and then, you know, when you're trading oil, you've got to trade what you see, not too much what you think, because it's very hard to trust what these officials are saying with any true conviction in that sense. All right, let's move on. The final thing I've got to talk about is the calendar, and of course, non-farm payrolls for today. So let's just skip straight to that because there's nothing really happening this morning from a data perspective. So non-farm payrolls, what is the deal? It is expected the headline figure at -8 million, um, the unemployment rate is expected to be at 19.8%, and the average hourly earnings going to be at 1%, and 8.5% month-to-month and year-on-year expected. So in short then, we are looking for further significant deterioration in the jobs market in America. But if you look at the prior month when we were in the full midst of the lockdown in America, which was in April, we had a job loss of course of 20 million. So what did that look like? Well, this is what we had— this was not— we had in the last two readings. And if you remember, um, the March reading caught the very, the very tail end of when the, the pandemic was really kicking off and the lockdown was just commencing. So this figure was -870,000. -870,000 is actually over and above the one singular biggest job loss during the global financial crisis in terms of a one-time month reading when it comes to non-farm payrolls. So this in itself is historic. And then bang, you get a -20.5 million. That is unprecedented. If I put it onto a, uh, a max looking back through history going into the '90s You can see the financial crisis, you can barely even recognize the dip in this line because, as I said, it didn't even get to 1 million in terms of a single month, and we were talking about nearly 21 million last month. So this month round, what are we looking at? Well, one of the things you need to be aware of is ADP. ADP is private payrolls, but it is often looked at as the kind of precursor for non-farm payrolls, and And this figure came in at -2.76 million. Now that is important. Why? Because the forecast for ADP this week was for a drop of 9 million. So the number came in at a much less, um, number of job losses than the markets were expecting. Significantly less, in fact. And so after that dramatic drop that we had in April, Yes, this is still economically a terrible situation, of course, seeing almost 3 million people getting laid off in one month. However, it's far less actually than what we were thinking. So again, underlying some of the general, you know, idea about, you know, the precarious nature of the economic recovery, well, actually this would fit the narrative for the bulls who are thinking, well, look, With everything and the kitchen sink that's been thrown at this from the Federal Reserve and, and from the fiscal packages from, from the White House, then, well, look, the, the data would show that we're recovering at this point. And given the fact that ADP has had this pattern, there definitely is, I would say, from today's reading, which is expected, as I said, on the calendar, on the headline, at -8 million, there is a risk of an upside surprise. So -8 million would be about here. But given what happened with ADP, I would say probably then there's going to be a leaning bias towards a number smaller than that. Hard to say. There's no exact science behind this, but anything around -5, -4 million, I don't think now is going to be too surprising, just given what ADP has. A bit of a litmus test then for how this might perform. In terms of a range, then the bottom end of the range, which is the most pessimistic, which is the most optimistic, excuse me, which would be only a loss of 1.6 million jobs. The worst case would be a loss of 17 million jobs, but I think if that did occur, that would be a big surprise for markets. Looking at then the overall kind of pattern that traders do to try and ascertain then how non-farm payrolls might perform is they go through the various different job indicators that we get ahead of the actual BLS number. And so Challenger Job Cuts, fairly neutral, not really too much to read into that. Um, initial jobless claims have been continuing to, uh, decelerate, if you like. Um, ISM Non-Manufacturing PMI and the Manufacturing PMI employment subcomponents were kind of bouncing, uh, particularly in the latter, off their lowest levels ever, but still heavily depressed. So would be indicative of still a fairly negative job situation. University of Michigan confidence, the Conference Board's Consumer Confidence Index, both fairly neutral, not really too much shifting around from their, their current readings. ADP obviously was a big positive, job openings perhaps a negative, but only slightly. So all in all, I don't really think any of this is that important, to be honest. Nonfarm payrolls today I don't really see it having too much of an impact. That doesn't mean that, you know, traders might not come out of the market. You'll see then a lack of liquidity, you'll get that new usual flurry of price movement and activity. But all in all, I really don't see non-farm payrolls moving the needle that much. And what I mean is the needle for the Fed, for people's thinking about any further additional policy stimulus in whatever shape or form that might come. These types of things which generally are underlying market movement at this time. So non-farm payrolls, it will have the usual kind of fanfare and, uh, and bluster, and it will cause a bit of movement, but overall I don't think it's going to be a dramatic game changer. And actually, it might come, and once it comes and, you know what, employment does get near to 20%, that's going to be splashed all over the papers, but the markets can digest that without much reaction or fear because it's priced in. And at that point then, once the number is done, it's parked aside, and do we just recommence then the trade and we finish off the week as we've been trading so far, which is pushing again up into the upside? So otherwise, any other tail risks in the form of trade war As I've been saying throughout the, throughout the week, trade war, as you'll recognize, has really taken a bit of a back seat in some respects because of the George Floyd protests we've been seeing across the United States. So when this type of thing happens, then, you know, tactically Trump needs to focus elsewhere, and then the trade war just gets parked to a certain respect. I did actually see some comments from, uh, I think it was— let me just bring it up— I think it was the Lighthizer, and he was talking, uh, and I'll finish on this because again, this is quite a good explanation of just generally how markets operate. Lighthizer here, who's the Trade Secretary in the US, so obviously very critical to the ongoing US-China trade talks, said he feels very good about the Phase 1 US-China trade deal and the report that China was not honoring the soybean purchases was false. Remember, that was the report that moved the market earlier in the week. Actually, the empirical data that came out in China did say they actually were still buying. And then Lighthizer being quite upbeat about phase 1 of the trade deal, which we were fearing towards the end of last week, 7 days ago, that this was on escalation mode. Now quite far from it. Trade war cycle, of course. All right, that is it. I'll let you guys get on with your day. Enjoy your weekend. Remember, those videos are coming out, so put your alerts on on your phone by putting notification bell on the YouTube channel, and you'll be able to catch those all as and when. All right guys, take care. I'll speak to you Monday.