Euro Rallies on EU Compromise

Okay, very good morning to you. Hope you all had a fantastic weekend. It is Monday the 20th of July, so a brand new week and a look ahead then of some of the key things for you guys to be aware of. Let's just start before we get into the EU commentary from the weekend as to how markets are behaving at the open today, and Despite some of the deadlocked headlines that we're reading in regard to those EU meetings over the weekend, the euro is actually trading higher. I'm going to get into the details there of exactly what's been happening because they've been discussing and negotiating all weekend. But the bottom line here, I guess, is the fact that, look, the talks are not off completely. And despite some resistance from the usual suspects, the Frugal Four in particular, with focus on the Netherlands, it looks like a deal or some kind of compromise is going to happen. So I guess as a net result, that is a positive, um, and therefore no one really was expecting a definitive deal to be struck this weekend. Remember what we were saying at the end of last week, just the notion of the fact that they're making progress could in itself turn out to be positive for prices, and that's very much so what we're seeing this morning. So the likelihood is here is that they're going to go into further negotiations and probably look to wrap something up towards the end of the month. So the euro is trading positive, as you can see here in the euro futures. We've managed to break above a kind of area of key resistance really for the week of last week, breaking up through the R1 this morning. And on a longer-term chart, this certainly starts to get particularly interesting. This is that chart we've been looking at for a while, which goes back all the way to the summer price activity from 2018, the retest at the beginning of this year and some of the fluctuations around the pandemic that we had in the recovery. But we've managed to bust straight through that, that trend line and area and cluster of resistance. And these are weekly candlesticks here that have been holding price for best part of nearly 2 months. It's just been broken now with a bit more conviction, and so forcing a push-up now towards the 1.15 handle, which would be that year-to-date high as far as the euro currency is concerned. So I'm sure Alex, um, part of our team who's been pretty bullish on this setup for a while, uh, is getting involved in that for sure. So on the week, definitely keeping an eye on how the euro responds at around this 1.15. Any breach above that, then obviously it takes out some of those relative highs that we've seen going back towards the summer of 2019 and opens up then the prospect of perhaps a deeper or higher run-up towards then the 1.16 mark, which should push us back up towards where we were towards the back end of 2018. All of that would also be contingent, of course, with any currency pair you're trading— obviously two currencies. So ongoing stability in the market would be almost necessary in order to keep the dollar in check from a risk perspective, and so that the euro can get some clear blue skies on the upside. In the equity market, you know, just interesting here, I was looking at the, the S&P 500 this morning And in the near-term price action, given some of the market movement we had last week with a bit of a roller coaster with the South China Sea dispute that we saw, then the California rollback of the reopening caused a bit of a dip at the beginning of last week. Before then, the Moderna news came, we gapped up, and we kind of gone sideways. So we're still in a relative range here, I'd say, as far as near-term price activity is concerned. So that, um, S1 level, uh, which is around 3197. That does mark up nicely with the overnight Asia Pacific lows and also the lows that we had towards the, the back end of last week that helped support price. Uh, and then slightly below there at 92.75 is that kind of weekly low. So that's quite a key area of support to keep an eye on, uh, as we go further forward, and not just today but this week. Uh, and then Looking on a daily though, what's so interesting, uh, this obviously starts to look at the much bigger picture, uh, this encapsulating then the whole year-to-date view and where we are at the moment. And if you actually look here in the top right-hand corner where my mouse is now, we are in fact just consolidating really between really the 132 handle just below there, 3196 and 3231. And interestingly then, this, this upside cap we've had at 31.25 in the S&P obviously marks those high prints that were resistance back on the 8th, 9th, and 10th of June. But where we are at the moment means that we are pretty much scratch for the entire year. Started the year at 3121 or there or thereabouts, and that's where we trade right now. So it's just interesting given the, the size of the volatility that we had in March. You know, the Fed have done a really fantastic job at basically just killing off volatility with all the different and scope and breadth of, um, tools that they've used to intervene in this market, not just from the traditional but the unconventional. That as well with the various fiscal policies that we'll, we'll discuss in a second as well has kept this market, um, to recover despite the economic reality that's obviously impacting lives across the world and in the US for sure. With the jobless rate still incredibly elevated, the markets are exactly flat. So where we go from here, I'd say, as we have seen over the course of the last couple of days, it does make sense to me that we're in this kind of phase of consolidation for the time being, just given what's happened with the push back up. A little bit of that profit taking on the second wave fears is generally starting to dissipate now, albeit the COVID situation is still under monitor. Still in intensive care, let's put it, as a subject matter to, to continue to monitor. So this week, really keeping an eye on the top end of that range. Obviously, any break above there, things continue to remain fairly bullish under those circumstances, and you'd be eyeing the 3300 mark as the next kind of stop on any push higher on a pullback. As I've said before, I think in, in some of the briefings last week, I don't feel like we're we're going to see a catastrophic drop-off here. Can't really see what elements could happen to instigate that type of move, although we continue to monitor not just COVID but the trade war. But even with that, we've seen some quite intense escalation and it hasn't really impacted the markets a great deal. So even if we did break the near-term range, I'd still be looking for support down at 3119 for this week. And then in oil markets, the final chart I just wanted to have a quick look at— we remain in pretty much the same setup as we have done throughout the last week or so. If we look at the daily, and that is that, that squeezing in on that key 41 level on the upside from that March gap down that we had on the failed OPEC meeting. So yeah, price was really unaltered by the JMMC meeting and that phased kind of rollback of the stringency of some of the supply cut, as was though largely anticipated. And so Again, continue to kind of put this in context of really what's driving this at the moment is the fluctuation of general sentiment about the economic recovery at this point. But technically, that 41, although it was broken last week momentarily, is still under, again, observation this week as a key level to keep an eye on. All right, well, let's get into some of the headlines. That's kind of the overview of the charts, and let's talk some, some of the news. And starting off with this European situation. So the European Council President Charles Michel proposed that the fund should include €390 billion of grants, with the balance made up of low-interest loans. So that's the latest out of this morning. A French official has said that the delegations now do see a path ahead for a deal, and talks are due to recommence at 3 PM London time today. So remember, they're originally scheduled for just Friday and Saturday, that's now rolled over to Sunday, that's now rolling over to Monday. So they've doubled up, um, on their time dedicated to this, which I think does show a lot of political will in order to get something done today, and probably says a great deal about why then the euro is reacting in a fairly positive fashion this morning. Breaking this down then, the Dutch Prime Minister Mark Rutte and his Austrian counterpart Sebastian Kurz rejected some of the new offers that were tabled at the weekend and stood by a pledge to limit grants to €350 billion. So again, right at the center of this debate is this idea about non-repayable grants. So remember, if you're of the Frugal Four, you do not want to be handing out money willy-nilly to countries without them being paid back. So they've been more going down the avenue of trying to decrease the grants and look at, look, we're willing to help, but it needs to be in a loan-based format that we eventually would be paid back, which obviously is meeting resistance from the likes of Italy, for example. So the frugal leaders on Sunday basically proposed that that amount should be cut back to around €350 billion. This would be a far cry from the original €500 billion that had been tabled in the original plan, as well as the Franco-German proposal, which was circulating back in May. Most diplomats see and predict a final figure around €400, and hence the reason why you had that European Council commitment number this morning of around €390. So again, this looks like the compromise. They've basically gone from about €500 worth in grants— Frugal Four came in, they wanted €350— they've now met somewhere towards the middle, coming up towards €390. So again though, The idea being that, look, it's not like there's going to be no grants, it's just a slightly smaller amount. But compromise is everything, and they've managed to get a deal looking like it's going to get over the line. Um, one of the comments that I saw from an Irish political editor in terms of timing was suggesting another meeting potentially either next weekend or on July 31st. And again, that isn't that surprising. There was really— no one was looking for a real one-and-done type meeting to get the whole entire terms around this deal concluded. But as I said, it looks like they're now kind of honing in on the sweet spot that would keep all party members satisfied from a European-wide basis. So continue to keep an eye on this, of course, but I think the reaction kind of says everything this morning. So higher. The DAX really has been relatively uninterested, but the Bund has backed off a little bit here. It's just dropped down through, breaking the, the highs that were seen towards the back end of last week, and it's just remained under a bit of pressure, sub the 176 mark now as I, as I speak. Elsewhere, I was going to quickly comment on US politics because as part of the calendar for the, for the kind of week ahead Um, this does pick up pace once again, so policymakers will resume contentious talks about the ways and forms of which they are currently implementing stimulus in their country. And this comes as much of the stimulus that they have put into place as part of the proactive response to the COVID situation and the huge downturn that's been seen in the US economy comes up for expiration. And this does raise some interesting questions. Then Republicans and Democrats remain at standstill on a number of these key issues, including whether to include a payroll tax cut. So if you actually look, there's a bit of a combination of looming deadlines towards the end of July, early August, where— and the— with this graphic on Bloomberg, I did share it on my Twitter account this morning, but it looks at what's ending And then basically what's at risk. So for example, households about whether or not they can pay next month's rent. And you know, there's estimated to be around 20 million households which would be subject to potential difficulties under those circumstances if some of these, these, these kind of short-term legislative processes come to a conclusion. $116 billion worth that was disbursed in June. This is reference to the amount of final payments that will come at the end of the month for an additional $600 a week federal unemployment insurance. And again, last month's context, that was around $116 billion. That could vanish at the end of this month. So there's a lot here to be done. Um, some would say then that you know, you need this, these, these types of cliff-edge scenarios in order for politicians to really start to, to take some action. If none of this was to be kind of rolled over in any type of degree, then obviously that would have implications for people's assessment about the, the future trajectory of the economic recovery in the US. So with that in mind, you would think that the politicians on either side on Capitol Hill will come to some form of looking to, to roll this out or, you know, introduce some sort of new form of stimulus to keep, keep the show going for the time being. But quite an interesting graphic here because such as with every COVID program that every government, the UK, Eurozone, or the US, has implemented, at some point that has to stop. It cannot go on forever. And that in itself is quite an interesting juncture for the markets, which have been predominantly supported by this unprecedented level of monetary and fiscal stimulus. What happens when it ends? And I guess with the monetary one, they've kind of set the stall out for a number of years. But in the fiscal side of things, remember, in a Western market sense, you know, politicians tend to be fairly short-sighted because they, they serve relatively short-term. So they need to have maximum bang for their buck, and the performance of the economy is quite critical to their political fate. So with that being said, my logic would dictate then that they'll probably come to some kind of compromise to, to keep a number of these programs ongoing until the economic recovery is more assured in its footing. Elsewhere then, the COVID situation, uh, this was the US, um, things still particularly high on the COVID situation, cases still north of 70,000 on a daily basis. I was looking at the weekend, Texas joins the 300,000 case club. So these rates obviously in the Sunbelt areas have continued to remain elevated. One interesting thing that I was seeing this morning is, I know this is a bit small to look at, but this is looking at all of the individual US states and their reproductive or R rate, if you remember in the UK watching those press conferences a few weeks ago where Britain would every day update what was the R rate, and the key metric here was that this figure needed to remain below 1. Now, the virus's effective reproduction rate, a critical point then of 1. Well, if you actually look at it, uh, this is actually got 1, 2, 3, 4, 5, 6, 7. I've seen other reports that would suggest all but 5 of the US's 50 states is, is above 1, effectively, meaning then that weighted by gross domestic product, about 95% of the US economy is affected by a viral reproduction rate that's greater than 1, i.e., meaning a cause potentially of exponential rise in case numbers. Now that in itself sounds quite frightening prospect for a market trying to fathom then the strength of an economy recovery, because what we're saying here is that nearly 95% of the entire US economy is being impacted by a situation where coronavirus at the moment is getting higher, not lower. Now a couple of points here to act as caveats before before we get to doom and gloom, and that is that in the current wave, the general lower levels of R— so typically we've not seen levels go, go up to 2, above 2, 3, and so on like we did in the first wave where it was much more aggressive. But a number of reasons really for that: the age distribution of the infected groups has been younger, the case fatality rate within intensive care units fallen as treatment has improved. And don't forget, just generally, people are more kind of socially aware of this issue, so they're able to act and be more aware of the kind of telltale signs of having contracted this virus and so on. So as a result, political resistance to full lockdowns in the most severely affected states has very much been a key thing at the moment. They continue to kind of press ahead and try to be very reluctant But as we saw with California last week and some of these other states like Texas under quite extreme conditions at the moment, it continues to be something that I'd watch quite, quite closely. But as I've said before, at the moment, although that case curve total of confirmed cases in America keeps rising, it's really the more tangible results of going back into more extreme forms of lockdown that we had back in, say, April that would cause, I think, a more negative reaction in markets. Anything less than that, I don't really see phasing things too much at this point going forward. Um, elsewhere, one other thing I wanted to mention was a few people have talked about a developing weather pattern in the Atlantic, and I just wanted to add a bit of context. This is the National Hurricane Center. There's a a weather system that's at the moment just going over central Bahamas and central Cuba, and it is heading towards over the Straits of Florida today and over southeastern Gulf of Mexico by Tuesday and across the central Gulf on Wednesday. Obviously, the Gulf is a particularly important area for any implications it could have on the oil and gas wells and refineries in this particular location. However, there's a 0% chance of a cyclone formation in the next 48 hours. So although this has caused— I've seen a few headlines— it's unlikely to be a material impact to that particular Gulf region when it hits in the next 48 hours or so. So just wanted to point that out. From an earnings perspective, just going to quickly jump over. I was tweeting about this at the weekend. This is your earnings kind of docket for the week. And what we have here are a few things. So there's 92 S&P 500 companies reporting this week, and then 8 of those being Dow Industrial components. Of the highlights here, probably Tesla and Microsoft coming after market on Wednesday will capture a lot of attention. Tesla doesn't actually tend to perform in history, as a guide, that well in terms of its share price reaction to its earnings, and particularly given the context of phenomenal gains that their stock price has seen over the last couple of months. They'll be quite an interesting one to watch. Microsoft always as well, being one of the largest companies in the world. Twitter, IBM, a number of the major US airlines reporting as well this week when it's been such a rough quarter for them. Be interested to see their numbers and how that plays out. Otherwise, from a calendar perspective for today, very quiet for today actually, and for this week. US data is particularly particularly quiet. That doesn't mean that there are a few things that I'll be, I'll be monitoring. So for today, not too much is going on. It's more focused around speakers. You've got ECB's de Guindos, kind of second in command if you like, under Christine Lagarde, speaking at 9 AM this morning London time. ECB's Lane later on this afternoon. And then two Bank of England members, Haldane, the outlying, I guess you can call him, on the more hawkish side because He was reluctant to vote with the group for more QE at the most recent, most recent Bank of England meetings that we've had. And then Tanray Rowe is also speaking. She's kind of centrist, slightly dovish of view. They'll be speaking together at a Treasury Select Committee hearing later this afternoon. For the week ahead, this is what it looks like. So Monday's pretty quiet. Tuesday, we're going into the overnight, you do get the RBA minutes, UK public finance data. Wednesday, some housing existing home sale numbers coming out. And then on Thursday, again pretty quiet, advanced consumer confidence number out of the eurozone and the Bank of England speaker Haskell. Friday really is the main event as far as the schedule is concerned. That's when we get the global latest flash PMI numbers, so first chance to see the flash data PMIs for July. So it includes everywhere— the eurozone, the UK, the US. And just having a quick look at that, this is what it looks like. This is looking at— the red line is the US, the green line eurozone, the yellow line is China. So China has seen the earliest and in some cases the most powerful recovery. Its number pretty much tracks over and above all of the measurements, um, in terms of the headline and its constituents against the US and eurozone. But let's just leave China aside for the moment. Looking at the US and eurozone here, we are looking for a continued recovery from these incredibly depressed levels. But would I get exceedingly excited about this? Not so much. Definitely be more keen to see what the overall analyst ranges are. And if we were getting over and above that, then sure, maybe perhaps that's a little bit, um, a sign to get more optimistic. But anything short than that, then probably not. Um, looking at the employment situations, I mean, these are ones, particularly in the eurozone, which still remain particularly depressed at this point in time. So all the more reason for them to get this recovery plan up and running that they've been debating all weekend. All right, that is it from me. Any questions, please do leave a comment in the chat. Otherwise, I'll let you get on with your day, and I'll see you again same time tomorrow. Thanks very much.