Geopolitics In Markets Explained

Okay, a very good morning. Hope you're doing well. It is Wednesday the 17th of June. Just before I begin, don't forget to like and subscribe to the YouTube channel if you're watching this there. It's your one-stop shop for everything from fundamental and technical analysis, but also check out AmplifyTrading.com, just looking at the website here. If you scroll down, you can find different kind of action points depending on what your needs are. So whether you are looking to become a professional trader or a student looking to gain some practical experience, then there's relevant sections. And then on the trader page, if you scroll down, there is actually our on-demand e-learning portal, of which if you just start now, you can get access to a couple of free taster sessions. So do check that out. But let's just talk about the markets and what's going on this morning. And if anything, I would say it's, it's kind of like a consolidation from what has been a fairly bumpy ride over the last few days, that being the kind of catalyst of a sell-off that we had last Thursday with renewed fears kind of priced in of a potential second wave. And still the virus needs to be tracked very carefully. Uh, but then obviously we've had a big bounce so far this week and, and yesterday a period of relative consolidation. So as far as the charts are looking this morning at the open, uh, it's fairly flat. Um, index futures are marginally positive. Uh, the S&P up about 4 ticks, the DAX is up about 18. Uh, gold is basically flat, the 10-year down about 3 ticks, and currency pairs also flat. Um, so all in all, um, my overall view— I mean, I'll talk about some of the individual stories that are in play this morning. Certainly there's a few growing tensions on various different geopolitical hotspots globally, but there's not too much in the way of kind of directional view that I hold this morning specifically. And so in a situation like that, I prefer to just kind of mark up the charts and, and let really the market price dictate actions in that sense, and not really try to, to force a view like the markets are overvalued. The Bank of America hedge fund kind of survey that came out yesterday was talking about how all these investors think the market is oversold. You know, try not to get too drawn into that and just kind of trade what you see in that respect until we get the next kind of catalyst And the catalyst, as it has been over the recent week or so, likely to come on any virus-type updates, is probably the main thing. But let's just have a look then at a couple of the headline stories. Stock futures drift after rally. So kind of as I've described, this is one of the, the kind of headlines of the morning. Beijing moves to contain new outbreak and Florida cases jump. So authorities in the Chinese capital city have reported 31 new coronavirus cases as of today. They've ordered all schools to shut and imposed restrictions, and more than 1,200 flights in and out of Beijing have been cancelled. So certainly the story of which we were talking about that did weigh on markets initially at the reopening of trade— we had the gap down on Sunday night and the initial sell-off in European open on Monday— that still is a a situation in development at this point. But authorities, you know, one of the things about why naturally a second wave typically is smaller than the first is that the authorities are in a better position to act more quickly. And also general public awareness for the matter is now increased, and so there should be an ability to react in a more appropriate way, in a more timely fashion. So that's not to say that this has been resolved, and certainly China are taking these measures very seriously, but we'll have to continue to monitor that. And then in Florida, infections reached a new high. Texas saw hospitalization surge as well. So some of those key areas still warrant watching, but I'd say at the moment not enough to kind of spook the market like what we saw last Thursday. I guess last Thursday was kind of even though those, uh, rate trajectories were kind of getting more steep, it wasn't really a real market focus at the time. The tensions were kind of scattered elsewhere. But now people are monitoring this more intently. They kind of know the daily, uh, incremental changes that we're seeing from a percentage point of view over the 7-day average, and it's not enough at this point to spook the markets beyond what we already know. So again, we monitor with great vigilance. But markets seem to be able to digest this now. And of course, it comes in the context of a couple of different things. We've had Jerome Powell speak yesterday, giving the initial kind of Senate hearing in his testimony, talking about the US economy's a long way to go before it reverses the substantial damage from the pandemic. So intonating towards this kind of mildly dovish stance that we heard from the Fed. Last week with that dot plot indicative of interest rates in America staying basically at ground zero for the foreseeable future until at least through 2022. Then you've had the Trump administration, the $1 trillion infrastructure proposal, you've had the Fed started buying individual corporate bonds, and then of course you had US retail sales come out yesterday and wow, what a number. I mean, it smashed the kind of top ceiling of the most optimistic estimate and It's so crazy, you know, looking at these charts the last 20 years of some of the statistical data, you know, we've never really seen anything like it, a catastrophic drop and then an almighty recovery. So, you know, question marks of course about whether or not that could be sustained, and, and probably not up to the degree in which it printed yesterday, but certainly as well that helping just generally offset than the kind of still, you know, there are other areas, India, Brazil, still have got infection rates on the rise at this point in time. But for the moment, as I said, it's being overshadowed by the steps taken on the stimulus front, both fiscal, monetary, and also some of the surprising strength in the US economy. You know, if you think about the, the payroll data, this data, and we are expecting further recoveries off the kind of bottom worst scenario that we had in that April numbers that are materializing now in some of the May figures reflective of the economy reopening. So other than that, the other thing that a lot of people are talking about, there are a couple of these geopolitical stories. And at the moment, Amplify, every summer we have interns with us and they always have quite a fresh perspective on markets, uh, because typically they're not used to seeing things on such a short-term intraday basis. And, and obviously quite a few questions were about what's going on in, on the Indian-China border, what's going on in North Korea, and, you know, is and why or why not is the market reacting to this. And so yeah, a couple of things to outline here. Um, let me go through the details of the stories first, and then I'll give you my overall kind of assessment. But This is one of the main headlines: 20 Indian soldiers killed in a clash with Chinese troops in the Himalayas. And so Chinese-Indian troops have been basically engaged in a standoff for— and it's intensified over the last few weeks over disputed territory in the region. This goes back to about early May, but this has been a long-going historical thing. You know, if you are aware of just general I guess, history within that geographic region. The kind of sovereignty of the land in that specific area is quite a contentious issue. India and China, they did fight, in fact, a border war back in the— I think it was the 1960s. But since then, there's kind of been a soft truce, if you like. The armies on both sides of the border, as part of that deal, were not armed, but they've found other ways to obviously raise conflict. And then it's resulted in this latest episode of which we've had, which is troops being killed, which would in fact be the first time in many decades of that taking place. I think since 1970. So, you know, why is this happening and why now and so on? So a couple of things to be aware of. This is a map of the area in question, and as you can see here, the gray matter here is China, and we're back in this this kind of area which is a hotbed, if you like, of contention. And that is because this is Kashmir. And Kashmir, as you'll remember going back to the Indian elections a few months ago, it was right at the epicenter of that political, uh, kind of event because about clashes at that time between India and Pakistan, of course. Whereas now what we're seeing is much more to further to the east which is the Indian-administered Kashmir, and where it borders then on the Aksai Chin, the Chinese-administered area, which includes then particularly the Galwan Valley, the hot springs, and Pangong Lake, as you can see identified by these red dots. So this is the kind of area, but you know, if you zoom this out a little bit, it'll probably make a little bit more sense. So here is the proposed China-Pakistan Economic Corridor. Now, if you remember this quite clearly, uh, Gwadar is the southern port in Pakistan, of which has received an immense amount of investment directly from the Chinese government. And the reason for that is, uh, this is kind of the Silk Road map zoomed in on one of the most important economic belts within the long-term vision of the Chinese infrastructure planning for global trade. Now, in order for this to happen, then China needs to form very close alliances with certain countries. Now, one of these has been Pakistan, but as we know, there is a long-standing tension in certain parts between India and Pakistan. And so here then lies the kind of root of some of the recent hostilities is because what's happening here is the investment has gone on to these south kind of ports in the Arabian Sea and Gwadar in Pakistan, and they're helping build the infrastructure— China, that is— from a financing perspective in Pakistan. And that leads then all the way through, kind of the right along the border of some of the, um, the areas of Kashmir that of course are often a hotbed of activity for political unrest. So here then, from a political connections point of view, uh, India is obviously more aligned with the USA in terms of the, the general political order, uh, and that in itself then has this kind of proxy element to the ongoing trade war of what's happening between China and the US. Now China and the US and what's been going on with, say, the Hong Kong security law or the escalation in trade tariffs and soybeans. I mean, that seems a world away from the Himalayan border, but it's not really, because actually the political connotations are still there. So at the moment, USA are kind of— they've said they're monitoring the situation. It was kind of similar, if you remember, when there was confrontation at the time with deaths between India and Pakistan in the Kashmir a few months ago, and the USA were highly reluctant really to get too involved because they know if they do, then it's going to be met with resistance from China, and then that in itself could jeopardize the overall trade war. It's just another element to make those talks more problematic. So yeah, I mean, there already is a— there's a— there's at the core of it, there's a problem about sovereignty first and foremost between who owns these specific areas between China and India. And then there's this more top-level, bigger picture story, uh, that underlies it, which is that between the US and China and their alliances strategically in that area. So hopefully that makes a bit more sense from a geopolitical point of view. The other thing, of course, then is South Korea. Now, North Korea blew up an inter-Korean liaison office near the country's border with the South. And that was, what, 2 days ago or so now. Pyongyang has rejected a South Korean offer to send a special envoy for urgent talks and reiterated plans for its military to re-enter the border areas. So North Korea here has definitely ramped up its kind of aggression on the peninsula. Interestingly, as I've said many times before, whenever you start to see somewhat of a material breakdown in the communication relationship between US and China. It's almost as similar to what we've just described with what's happening with India and in the Kashmir. There is actually a problem there between the sovereignty, as we said, between China and India. There is a problem here between the border and between the north and its alliances, of which they have with North Korea typically with China and South Korea typically with America. So here then lies the same problem. Uh, you have this kind of suspiciously, um, accurate correlation between hostilities in the peninsula to the, the current kind of context of the ongoing trade negotiation between the US and China. Normally the worse it gets, the more hostilities you start hearing coming out of North Korea. Now I'm not trying to be a conspiracy theorist here suggesting that China are at the heart of trying to order Kim Jong-un to do whatever he sees fit, but what I am saying is that China definitely have the ability to better control and maintain peace and order within that region, and so if they like and they see fit, they can back off a little bit. That allows Kim Jong-un to be a bit more assertive and aggressive against other parties, namely here the South. And that's problematic because that in itself is almost a test on America because of America's alliance with South Korea. Again, I know this is all probably, uh, going perhaps a little bit over your head for some of you, but, but certainly, you know, geopolitics is is a fascinating subject. There's a book I highly recommend to everyone to read, it's called The Prisoners of Geography. I'll put a link into the video so you guys can, can check that out, but it explains all of this. You know, none of this is new. You know, tensions in these regions have been ongoing for decades, if not hundreds, in some case thousands of years. You know, it's just history repeating itself in a modern context. In this respect. Bringing it back though to trading, what does it mean for markets today? I think very little. And the main reason for that is because really two things. For one, as I've just said with that last point, these are not new, particularly new episodes. Yes, they are escalation from where we have been, particularly in the case of India. It's been, you know, I guess the best part of 50-odd years since we've had deaths related to the sovereignty on that border in the Himalayas. But that doesn't— markets at the moment are focused on other things. If there was no virus, if we were not in a pandemic, if the stock market was not so disconnected at the moment to Main Street, you know, if there wasn't these other things happening then sure, geopolitical events such as this nature could have the propensity to move markets. At the moment, the way I see it is that they're just not important enough to overshadow the bigger subject matter at play at the moment, which is how is the economy going to perform under the guise of the pandemic? And then that is related to then what is the performance of the virus and what is the reaction from authorities, i.e., central banks and governments, to counteract this? That at the moment is still a way bigger focal point for markets, not unless something extraordinary happens with this situation. But as we've seen many times before, even with North Korea, you know, for some of you, blowing up a liaison office might look, when you watch the pictures or videos, a little bit punchy. It's not actually that unusual to see that kind of aggressive um, event unfold in that region. So yeah, we track these things, we have it in the back of our minds. It's not, um, something that we completely disregard. But at the moment, I would not see that as a factor that's just going to turn the tide of risk sentiment. And if that were going to be the case, it would have already happened, and it hasn't, which kind of supports that view Anyway, so yeah, hopefully that makes a bit more sense in how I interpret this type of information. Um, this is then something else coming off completely different subject, going to talk Brexit just for one moment. And another good kind of lesson I guess I can, I can give you, because again, this isn't important so much for the pound today from a trading perspective, but hopefully I can explain a little bit how, how I construct these views about over the medium term an asset might perform. And this is a very useful timeline going from left, current day, to right, which would be basically the end of the year, and then to the end of, um, 2022. But the end of the year being here, and it gives you every fixed predetermined milestone for Brexit negotiations that we know of at this point in time. So for me, that's a very important factor because it helps me identify then how I can perceive the future news cycle to look like. And the reason why that is important is, as we've been discussing with these other subjects like the geopolitics in the context of the pandemic, you know, there's all these ongoing things happening at any one point in time. So if I know then when there is a big milestone event happening, well, then I can probably foresee then that in terms of this hierarchy, if you like, of the major macro themes, one is about to potentially supersede another if there is a deadline approaching, because it's kind of like a do-or-die moment, if you like, for that subject. So for here then, it's very useful to know, um, what this kind of looks like, you know, where the potential increases in volume, volatility, market positioning could occur going into generally these deadlines as the news starts to intensify as well, and generally focus shifts to to a new narrative. So here with Danske, I'm not saying that their view is my view or the view, but definitely I think reading a lot of different banks' views about what they foresee for Brexit is quite an important way to basically formulate your own opinion. And so let me give you Danske's take. They're basically saying their base case which they're assigning a 65% probability, remains a simple free trade agreement on goods, not services, in the autumn. So they're looking at around this type of time. And remember, that's what we were talking about in the briefing yesterday. Some of that press in the UK was suggesting as well at the weekend that actually it's looking like they're not going to request a formal extension, I think, from the the line that the UK government are following at the moment, it's looking like that's not going to happen. So then it's a when can they do a deal? And as far as a lot of people are expecting, as a baseline assumption for most banks, is that we can in fact get a deal done by the end of the year. But don't think that that's just the end and that's Brexit done, you know, this is just the beginning. It's going to be a pretty simple deal and one on agreement of goods and not services, so plenty more work to do, but enough for the politicians to claim a victory that they've progressed. Um, Danske say they do not expect any breakthrough this summer. Again, it's the autumn they're looking at, and they say they still assign a 35% probability of a no-deal Brexit by year-end. So don't forget, once we go through June, the important matter here is you've now got to get a deal done by autumn, end of the year latest. And so here you can see end of the year, you know, last chance saloon would be the mid-December EU summit, but it's the October one. So potentially the new soft deadline, the 6th round of negotiation, could happen here more formally, and then that could lead to then an agreement in October is what these guys are thinking. But that is echoed by several other banks that I've read of late. We have had some UK data this morning, so just to get you up to speed, um, CPI came in at 0.5% year on year, in line with expectations, the lowest since June 2016. So again, the figure in itself substantial from a statistical, statistical point of view, the lowest since June 2016, but the markets do not care. Remember, um, this is in line with expectations. A decrease in this case, given the situation, is to be expected. So none of these numbers coming out of line and thus no reaction in cable. Cable's flat this morning as well as it trades. On the pandemic front, the UK Health Minister Hancock has come out this morning. He said the R, so that number of which needs to stay below zero to stop then this exponential growth of the virus spreading, he has reported this morning it's below 1 in all regions in the UK at the moment. And this is what you've probably read in the papers about pressure on Boris Johnson now committing to to reducing that social distancing from the current 2-meter rule. In the oil markets, the final thing then to cover, we did have the oil inventories, of course. This comes ahead of the DOE numbers later. And we had an API build of 3.857 million. That was a surprise, actually. You know, if you think about it, a lot of people, you know, here there were expectations of storm-related drop in inventories. Remember, we had Cristobal go through through the Gulf of Mexico only a couple of days ago, and some were expecting then that that would lead to a bit of a drawdown, but far from the case. We actually had a build. Now, Cushing was a draw of 3.289 million gasoline, a pretty large build of 4.267 million. So all in all, oil did track a little lower after these numbers came out, but you know, if you actually look at the oil chart here we're just in this new kind of area of consolidation for the time being. And so any kind of bearishness from those numbers counteracted by some of them, the more positive kind of economic situations unfolding, like yesterday's retail sales, the kind of pledges from the Fed and the Trump administration and so on. So yeah, all in all, markets fairly flat this morning despite some of the geopolitical news. Hopefully I've managed to bring you up to speed on. I don't really see that as, as particularly important for markets, at least at this point in time. So for now, it's kind of, uh, quite happy to sit on the hands, wait for the next kind of catalyst, otherwise looking to play the market from a more technical perspective, uh, in a more range-bound consolidation type pattern, uh, unless something unscheduled were to develop. All right, that is it. As per usual, any questions that you have, please feel free to leave a comment. Love to, to engage with you guys, so, so happy to do so as well every day going forward. But otherwise, have a good day and see you tomorrow morning.