GBP volatility As Brexit Negotiations Rumble On

Okay, very good morning folks, hope you're doing well. Wednesday the 2nd of December, uh, just going to give you a quick update, uh, recap of what happened yesterday. Positive close across the 3 major indices on Wall Street. Why did that happen? I look at the key things to watch out for today. Certainly there's a few things such as the ability for OPEC headlines still to influence the oil market today. Brexit, the euro's broken above a key level, continuation of dollar weakness. And so yeah, a number of things I, I'd like to go through this morning. So, uh, taking a quick look at how we finished first, and then we'll go through this in kind of chronological order. So the kind of combination of more positive progression on the vaccine side of things, a couple of early signs of appetite perhaps picking up on Capitol Hill about another federal spending plan to come forward, which will we'll dive into in a moment. All of those things help sentiment in the Asia-Pacific session. Remember, we had Chinese Manufacturing Activity Index showing its fastest acceleration in more than a decade. So a number of these things did, did help. But I, I guess one of the things I wanted to talk through which might help pull all of this together is the kind of cross-asset class movement. Yesterday we, we generally had stocks bid, gold bid, dollar weakness, and weakness in T-notes, so higher yields. Now, I want to kind of focus on the yield story a little bit because I think that can kind of then be the catalyst then to explain some why the other moves were happening. And it did throw a little bit of people by surprise because yesterday, if you remember, we had the latest ISM manufacturing figure come out. It was a touch weaker than expected, but still heavily in expansionary territory. But the employment component was particularly weak. And people are looking at that, obviously employment data are very sensitive this week because we've got the National Employment Report, payrolls on Friday, and expectations are for job growth, but deceleration as what we've been seeing in more kind of real-time data in the likes of the weekly jobless claims, which have been rising. That idea then that that forces the Fed in a sense to then have this lower for longer mantra. And that is one of the underlying reasons of the continuation of dollar weakness. So currency markets liked it in terms of euro-dollar cable. There was some other headline news flow for sterling late in the afternoon, of course, that blipped it up. But that also showed an initial positive reaction in stocks. However, yields— yields actually really saw a decent move to the upside. And I wanted to talk through this because the reason behind it, but also then what does it mean for other asset classes? And this is the kind of headline on Bloomberg and a few pieces to walk you through. So here, Treasury yield spike risks sparking a domino effect. And here then is what I'm, what I'm kind of talking about. And the reason for this is because the benchmark 10-year yields jumped back toward 1% yesterday. And if I just look at the 10-year yield, this is what it kind of looks like if you're seeing it in yield terms rather than price, if you're looking at the T-note. And we're coming back up to where we were earlier, um, are in the aftermath of, I guess, the initial election kind of volatility, and back to the highs and where we were trading in the early part of summer. But 1%, really, we haven't been above that level since, uh, kind of the pre-pandemic, or around, I guess, the volatility of the initial pandemic here back in March. So a couple of different things. Stocks, you know, why then Would the yields be important for stocks? Well, I've highlighted a couple of segments here from a Bloomberg article that I really think, I guess, is much easier to then simplify the reasoning or rationale. And here, one of the clearest winners from a modest rise in Treasury yields could actually be equities. Now, some people often think then that there's kind of this inverse classical relationship where there's kind of rotation on risk of into one and out of another and vice versa. And that actually, um, if yields are rising, well, then that should mean as a net consequence probably tightening of rates and therefore bad for equities. But I'd say you've got to think about the stepstone approach to get to that point. I mean, we're a million miles away from rates rising in the US, multiple years, and that's even been pushed out further as far as investors' psyche is concerned by the likes of Janet Yellen coming in as the nominee for the Treasury Secretary, for example. So here then, what we're kind of saying is that one of the clearest winners for a modest rise in Treasury yields could actually be equities, because rates aren't going to change anytime soon. And this would be then tied the yield movement to the perception then that of a reflating economy, that being then that as a signal that economic recovery is going to take hold And as we said, we've had a lot of positive developments on how quickly the approval process is happening with some of these latest COVID-19 vaccines. So the MSCI World Index is already trading at a record, uh, and the rotation to cyclical shares such as industrial and metals or materials names very much so accelerated last month. And that would be tied then to that economic recovery kind of narrative in that sense. And they were the stocks obviously that were beaten down and were hard hit during the initial onset of the actual pandemic. So that's stocks. The other thing here then is looking at gold and how might that react in this way. Um, because as you know then, if the normal sequence of events— if it's higher yields and it's tied to then rate thinking, as policy is going to tighten, well typically that should strengthen the dollar and net result then inverse reaction would be weakening gold. But actually, um, again, we've got to get to that point. If rates are going to remain low, well, then one of the things here is the Treasury yield rising to 1% or even higher, back to where we were initially, kind of let's say pre-pandemic, is due to a reflation trade. Then inflation breakevens, gold and gold miners and commodities usually do well. You know, if there's going to be future inflation in the future, of which if there's all this pent-up kind of stimulus in the system, there's more perhaps coming in the, in the US, and we're going to have a very loose accommodative monetary policy, well then inflation demand as the economy grows will definitely pick up. And therefore, as an inflation kind of hedge, that could be very good for gold and associated commodities and gold miners on, again, that, that recovery story and hedge play. The other thing then is looking at the currency market and kind of making sense of some of this dollar movement. And we already know then that that lower for longer rate mentality is, is obviously negative for, for the US dollar. But should the US yield curve steepen as inflation expectations rise, as we've just discussed, this will incentivize investors to currency hedge. So Citigroup strategists were talking in a recent note and they said moves by investors to shield from currency fluctuations in US investments could see the dollar fall as much as 20% next year. I mean, that's a pretty bold call, but I think just worth noting then in terms of the, the prospect for the dollar and why a lot of these big funds are very bearish on the greenback at the moment. Goldman Sachs Asset Management, who see the potential for more curve steepening, so i.e., higher rates longer out, is forecasting a weaker dollar against emerging market currencies such as the Chinese yuan. And I think, yeah, there's a couple of good graphics here. I did share this on the Amplify Twitter if you wanted to have a look. But hopefully that makes a little bit more sense of the world and why some of these movements are happening at the moment, because I think a few people were scratching their heads as to the yield move that wasn't quite fitting with the overall other asset class movement. But hopefully that makes more sense of why. And I think that yield move was definitely more tied to a lot of this conversation, which is talking about the prospect of more spending in the US. And so let me run you through, I guess, what you need to know in terms of where we're at with this. So US Congress should include a fresh wave of coronavirus stimulus in a must-pass $1.4 trillion spending bill aimed at heading off a government shutdown in the midst of the pandemic. That was according to the top Senate Republican Mitch McConnell yesterday. President-elect Joe Biden separately spoke of passing a coronavirus aid bill quickly and debating an additional bill early next year. And Congress needs to rush all of this through basically in the next 9 days, so by December 11th. And the reason for that is they need to keep government agencies funded, because without action and a compromise, at least at this point, a range of government programs will be interrupted and many federal workers will be furloughed, which they'll definitely want to avoid just given the economic situation of this pandemic period. Separately, one of the other things we heard yesterday was a bipartisan group of senators and House members have proposed a $908 billion amount in the range of COVID-19 relief measures. So nothing really concrete here, but if you remember, the kind of stimulus talk went absolutely silent after— there was a lot of it going into the election because there was a lot of political posturing by both parties trying to kind of show their will to help the common man in America. But we kind of knew though that Pelosi and Mnuchin were never going to cut a deal at the risk of giving the others a victory, the other side, ahead of the election. So as soon as that election played out, as it has done, the whole talks have just ceased. And although there hasn't been too much of a negative invert or negative impact in markets. The longer that goes on, probably the longer there potentially could be. So overall then, what this has meant is that this talk yesterday definitely has been a, uh, kind of, uh, a positive step forward, progressive nature of then the idea that there could be another spending bill coming in the US. And, and obviously that then has having implications on, um, both yields but also helps with this equity story, and hence the reason why the NASDAQ and the S&P were back up at those record high levels yesterday. You'll have to excuse the jingles. It's not, uh, it's not quite Christmas yet. My cat's having his, uh, morning exercise. But, um, just having a look then at some other, other headline stories that I wanted to update you on. One is that equity index futures have drifted a little bit off the highs during Asia Pacific Pacific session. Now, I don't think that's too unusual given a day of rises like we had yesterday. The market does tend to go in an ebb and flow. We get a push, a bit of a pullback. Directionally though, like the dollar's weakening, equities generally are trending higher. One thing to be aware of though is the New York Times piece. This was talking about what we kind of touched upon yesterday in the FT at the weekend, which is this idea that perhaps China actually might have preferred Trump getting a second term rather than Joe Biden. And this latest article really kind of sums that up to a certain degree because overnight in the Asia-Pacific session, the offshore yuan erased again after a report that President-elect Joe Biden won't immediately remove tariffs on Chinese goods and plans to review Phase 1 trade pact with China and consult with allies in Asia and Europe. Again, I think it's a bit of a misconception. People kind of make the assumption that if it's not Trump, then there's, then there's no problem with China and there will be no tariffs. I think that is inappropriate in that kind of assumption. Definitely Biden has the same kind of interests of America First type mentality. It's just expressed in a different and more unified response with the developed Western world. And that is what causes slight more geographic tension there with China and on geopolitical relationship. And hence the reason why we saw a little bit of overnight movement in the offshore yuan, because of its nature that the tariffs are not going to be rolled back just because Biden's come in. And we're going to have to wait the response to see really the details of how this plays out over the coming months. But certainly the risk factor, if you like, of not really knowing what's going to come next from Trump has been removed, and that generally will help calm and stability on the situation. One would think more rational minds would kind of win out in the end. The other thing then was Brexit, and we had obviously that big late pop in the pound. I can see as soon as I've started delivering this briefing, headlines obviously come out because look, the pound's just blasted lower. Look, even as I'm talking, if I stick this on a minute, look, this is literally just happening right now. So you— whenever there's a fundamental piece of news, when you look at charts for long enough, you can kind of get used to price pattern movement. And if there's a fundamental development, then it moves markets immediately. There's no building up of price and trending. If it's an important piece of news, it moves the price. And the price of sterling was susceptible to this today. And this is, you know, welcome to the land of Brexit headlines. This is what it's all about, really. And I think this is why you've got to be very agile and adaptable to conditions. We know how negotiations go, right? It's, it's signs of progression, roll back, signs of progression, roll back, posture. I'm going to leave the talks. Then I come back. So we go from extremities of really positive to really negative, and this really explains this trend we've been in for the best part of a week for cable, which is up and down, up and down. And, you know, don't get chopped up in that noise and just, just look to take the broader outer range of that market and then play accordingly. And, and certainly, you know, one of the guys got a really nice trade off the low of the range and held it all the way up, and then into the top of that end of the range. And, you know, just good patience of just playing that, that, that standard range. But then late yesterday we had the headline break, and basically it was indicating that it was Tom Newton Dunn, the former Sun political editor, now the Times Radio, came out and he was talking about they're moving into more focused tunnel talks. We broke the range, the headline came, the catalyst was the tweet, and and then we snapped higher. Came quite late, generally then tends to exacerbate the price movement. It was around 4:10, I think, when it happened, that sort of time, and we blasted higher. But we've just blipped lower, as I said. So the latest here I can see, EU chief negotiator Barnier has told EU envoys that differences remain on the 3 key sticking points. Trade talks of the UK, a deal still hangs in the balance. So If you, you know, if you just step back for a moment and take a bird's eye view of what's happening, the same 3 sticking points. So nothing's happened. One would suggest that there's no smoke without fire and they're kind of, I guess, the frequency of the idea of them cutting a deal has come from both the UK and the European side of it happening as soon as this week. Regardless of that political outcome, I think the best way to think about this is market positioning. What I mean by this is that the pound was high. I mean, it's moved up through the top end of that range with that dollar weakness obviously also helping. But the idea being then is the market is progressively pricing in a deal, and so anything that would detract from that point is going to be met negatively. So rather than try to be this political soothsayer, as much as we can express that, and you know, still my view is I don't think they're going to get a deal done, as I've always said, until a little bit later on in this month when those real hard deadlines start to emerge. But that aside, just think about, well, if the pound is very high and it's based on optimism of a deal happening, well then ultimately there's more risk to a larger move to the downside than relief rally to the upside. And that's the best way to approach approach it. Just having a look here at the pound, I mean, technically I was kind of lining up these charts to have a bit of a talk, and I guess this, this latest Barnier comment has kind of done that job. But on the upside, there is obviously that early September high that we had on the 1st, which is definitely worth keeping an eye on should we resume the upward trend at 1.3483. Looking at the futures here, the reason why that level is really important is if I put on— if I put sterling on a weekly chart. This starts to incorporate now, um, this is the e-referendum right here on the left-hand side. So I've just got a broad, uh, fib retracement of the entire high to low of the referendum price activity just to give me an overall bigger remit of what I'm looking at. And you can see why that September level is quite key. That's this one here that we were just looking at on the daily chart. This is now looking on weekly. So these levels here go all the way back, and this is such a key area here around 134.83. If I'm looking on the weeklies here, we're not that far off here, uh, at the moment, within a point. Um, I mean, that's even taken into the Barnier move, so we're even closer before that came out. So really quite key. Any break above here, you've got the 618 retracement of that entire sell-off, which would be just above, and that would start coming in around the 136.5 type level. The bigger level then target-wise would be 140. But in order to get up here, um, on the balance, I think that we will actually in the coming months because the dollar, if it does continue this weakening trend of all the things we've just spoken about, in combination then with actually a trade deal secured through the negotiations as we go into the new year, well then that actually could be quite optimal then for a technical break above these key levels and then a move back up to 140. So yeah, but that's more definitely more medium term rather than intraday at this point. So for now we're back in that, that kind of cluster of price movements. So although we're drifting south here in, in the pound, I definitely probably wouldn't be interested unless it comes back down to the lower bound of probably these areas here firstly which was the last two days' lows. And if not, then below, a little bit lower to the low on the 24th and later on the 27th down there. Yeah, but a good, hopefully, exercise of just explaining the news cycle and how to react to those types of headlines. The one thing is with Brexit, you know, I'd say you've got to be quite proactive with managing any trade really if it's tied to kind of a sensitivity of a political development. The reason for that is central bankers, very rarely do they flip-flop and change their tone and what they're saying. Politicians do it like the change of wind. It's just how they roll. So with that being said, then you're always at risk of a lot of headline noise, particularly then that intensifies as we get in towards key deadlines. But again, use that market positioning as your guide. While we're on currencies, Absolutely a key one to keep an eye on is going to be the euro. Now the euro saw a really big breakout of a really important level, of course, which is this 1.20 level. Now this is the move that, that happened yesterday late afternoon. It kind of coincided as well with when that sterling breakout happened, just kind of weighed on the, the dollar even more at the time. And we have printed up very close to 121 now in the futures, so we're kind of locked in a little bit of a short-term, uh, range as the market kind of decides then what's the next move here. If we start to break down in price, probably be just using some of this price movement then as floors then to manage the position on the retracement back down. But a key thing here is, why is 120 so important? Well, this is looking now on a a daily continuation. And on this chart here, you can see price activity from on the left-hand side here around July through to the current day. It was back at the beginning of September on the 1st when ECB's chief economist Philip Lane came out and said euro-dollar rate does matter. This was that voicing of concern about the strength of the euro which we were talking about yesterday. And then the move that came after that was pretty strong, which was, you know, kind of tantamount to ECB intervention to offset then what had been a euro currency— remember the context of the time— within the prior 7 weeks, 8 weeks of that statement from Philip Lane, euro-dollar pair had gone from 1.13 to 1.20. So the ECB probably felt pretty compelled to come in and go, well, we need to stop and we need stop this freight train, otherwise this is going to really impede the European economic recovery. So they did. Now yesterday— well, the previous day, I should say Monday— we got up to 120. You remember what happened? Big rejection, and we came all the way back down to that range high of the highs that were seen in Sep and early November. And then yesterday though, smashed through there with a combination of those different themes which we've been talking about coming through. So it shot higher and a big breakout on confirmation of that break. So the interesting thing is today— and let me just triple check the time— Philip Lane, the same guy that made the comment here, is talking today at 2 PM London time. Now Lagarde was talking yesterday, but she spoke prior to this breakout in euro strength that we saw. And so I'm particularly interested to see if he comments on the euro, regardless of the subject matter of his, his topic and speech, um, what he's talking on. So something to definitely keep an eye out for if they start jawboning the currency, which is effectively trying to talk about perhaps economic risks, or the fact that they're going to do more in terms of the PEP or stimulus, or monetary policy being looser. All of this an attempt to try and slow down the runaway strength of the euro because if we look on the weekly, um, there's a couple of interesting things to look at here on the weekly chart. I mean, the last time we were up really firmly above 120, which was back in 2018— this is 2018 era here— and this is a key area really at 121, which was that high. This is actually the high of the summer of 2017 here. We can see as resistance for a period at the beginning of January 2018 for the break higher that came, uh, the week after the New Year period of that year. And then it was a support point for the break back down below that point. So that area we are within touching distance of already as of this morning. So that's quite key to watch. Big area of resistance is the next one beyond this 120 breach that we've seen on the higher time frame. Any move beyond that point probably would start looking up to around the April 18th highs So we start pretty much going in point increments now. So that is around 121.80 type level, and then to the bottom end of that kind of range, 122.50s. Um, and then really the 2018 high, you'd have to get much higher up. But one would imagine that if we start getting a one over 125.50 toward 125 in itself up here, I mean, the ECB will really, I think, ramp up then some of the talk to try and verbally intervene and manage that price appreciation. But there is risks there for the ECB, given of course the overall market positioning is fairly bearish at the moment for the US dollar. So that as well with— don't forget a divergence at the moment of COVID situation, where typically COVID is at a slightly more advanced stage of plateauing in some countries in mainland Europe and even in the UK as restrictions loosen as of today back into the national to more localized state tiered levels, comparative to still a pretty bad situation that's unfolding in the US. On the point of vaccines, the latest there for timing is that the first shipment of Pfizer's COVID-19 vaccine will be delivered on December 15th, and the first shipment of Moderna's vaccine will be deliver on December 22nd contingent upon decision by the FDA, which will review those, um, particular vaccines on December 10th and December 17th respectively, according to the Operation Warp Speed document that was circulated yesterday. All right, final things, because I know I've been talking for a while, but hopefully this has all been a useful exercise. Um, just going to have a look at the API numbers from last night. We had a build of 4.146 million. This was surprising against analyst expectations of a draw of 1.7. Gasoline also fairly sizable build of 3.4, but cushioning a draw just over 100,000. Although those numbers definitely fit this kind of recent price movement of oil trading a touch heavy, you know, there is a bigger story in town at the moment, which is the OPEC situation. We obviously have already known from the day before about the delay in talks while they'll look to try and kind of manage the situation in order to get a deal done. I still think they'll get a deal done and they will roll over as the base case view in regards to securing them the current existing PAC through Q1. However, it's not done until the fat lady sings. And so until that point, I think you've got to be aware of the the fact that they could still be breaking headlines, rumors, and so on. So I'll keep you informed, obviously, in the Amplify Live room, myself and Tim, but worth keeping an eye on Twitter as well. There's a couple of things. The latest last night from one of the main talking heads was that there's a lot of hope building towards reaching agreement to roll over the current cuts for 3 months. The consultations between OPEC and non-OPEC members will continue as of today. It's not really giving away too much, uh, at the moment. Again, got to think about kind of scenario building, uh, the bigger risk here, given that if I just zoom out of this chart just even slightly to incorporate the month of November, oil obviously has seen a really strong move from the high 38s up to the high 40s in price. So the risk is to the downside, um, if they decide and cannot get enough cohesion amongst the OPEC+ alliance to get this rollover in place, well then this price is susceptible to a fairly dramatic pullback in price. But again, I would say that that is low probability outcome of those discussions. That meaning not till tomorrow. That doesn't mean that we might not get more comments and movement there, um, today. Okay, rounding up, quick look at the calendar. What have we got? I'm just having a quick look here. You've already had a few things this morning. You've got European unemployment rate. I don't see that really as a market move or consideration. I think at the moment the market's more looking technically at the euro given the lofty levels we trade, given the accelerated price yesterday. And as I said, chief economist Philip Lane speaking at 2 PM will be a key one there. I think in the interim period, look for dollar movement though. We do have ADP national employment 1:15 We've then got the oil inventory data to follow up from the DOE at 3:30. And then speaker-wise, it's all based in the afternoon. A couple of Fed speakers to accompany Lane from the ECB. And you've also got Bank of England's Haskell is speaking at 6 PM London time at University of Bristol. So that is it, guys. Let you get on with the day. I'll see those on the live stream in Amplify. Live. If you'd like to join us there, remember, check out the link below if you're watching this video on YouTube. Otherwise, stay safe, have a good day, see you same time tomorrow. Thanks very much.