German recession may force fiscal stimulus

Okay guys, good morning. I hope you're well. 24th of September, so looking forward to the session ahead. Just want to cover off a few things in the briefing this morning. I mean, look back at yesterday, so the first session of the week of course, but now really only I'd say two main points of note, with one of them being the most important, which was some, you know, quite again disappointing data from Europe. Um, so we'll look back at those manufacturing and services PMIs and have a, have a look at, um, the market reaction to that. And I want to talk further about how that might play out with regards to things like Germany's fiscal policy. And, you know, as the data indicates more and more that Germany are probably in a, a technical recession, is this going to finally force the hand of the German government to kind of just open the checkbook a little bit and spend some of the surplus that they've got to try and boost economic activity. So we'll talk a bit about that. We'll obviously cover off all the headlines that have been hitting the wires overnight. We've had this US— sorry, UN General Assembly, so there's been some Brexit chat from, from Boris of course. And then we'll have a little look at good old Donald Trump's latest impeachment saga and whether or not that's got any ability to escalate and, you know, cause any market volatility. I mean, certainly at the moment, financial markets aren't too bothered by this latest Trump revelation, but we'll discuss this. But let's, um, let's look back at yesterday first before we talk about what happened last night. I'm going to bring up the EURUSD chart here and we'll start. This is a good place to begin when discussing yesterday's session. I'm kind of in the briefing yesterday. This was kind of happening in real time and I did cover it a little bit. So we had a nice solid devaluation of the euro and key breaks of that Friday low. Which was kind of coinciding with the low when you go back to the kind of 16th and 17th of September. So nice euro devaluation moving down to test some levels that we had seen earlier on in the month. But just get that back into picture. So good. Well, looking at this, it was really just shy of the 1.11 handle where we started the the session and in the end bottoming out down at 110.32. So, you know, definitely a decent move, 60, 70 pips to the downside. So what was going on here? Well, as I mentioned, bad news from Europe, and let's take a look at that. So if we switch up the screenshot here and just take a look at some of these services and manufacturing PMI figures from yesterday. I'm going to start with Germany here, so let me just bring up the chart of the manufacturing PMI. So we covered this live in the briefing yesterday morning, but as you can see, we had a print on the far right of this chart, 41.4, which basically is the worst reading for 10 years. So you've got to go back to right in the height of that global financial crisis a decade ago to find the last time that the German manufacturing PMI number was this bad. Now, we had expected a move back above to— back up to 44, which, you know, even if it was 44, it's still very bleak and a very long way below 50. So into contractionary territory for this PMI reading, of course. So 44 would have been a continuation of the really bad figures that we've seen over the last 6, 7 months. But to dip again is very worrisome. If I go to a 10-year chart, you'll see what I mean. This move to 41.4 takes us definitely firmly below that 2012 low. And so, yep, it's a 10-year low. In the crisis, we did get down to 32, but certainly 32 is a number you, well, you won't see very often. I mean, such was the extreme nature of that global crisis. But, um, so this was obviously bad news. Um, on the services side, if we look at Germany's services sector, but of course They are very— certainly for a developed economy, Germany are unusually dependent on their manufacturing sector. But on the services side, it was really disappointing as well. I mean, I guess the silver lining is at least this number's above 50, so you, you would say that the, um, the services sector is still in expansionary territory. But nevertheless, it was quite a bit worse than what we were expecting. We also had some disappointing figures from France. And if we look at the Uh, let's take a look at the eurozone GDP— uh, not GDP, PMI numbers overall, because we had Germany and France only, uh, reporting yesterday, um, as well as then the European overall number. And because of the German disappointment, and obviously because of the, um, huge portion, um, of the European data that Germany makes up given the size of that economy, um, it's not a surprise that this dropped to a new 10-year low as well. If we go back 10— sorry, this wasn't a 10-year low, apologies. We're edging towards 45. We were a touch below this back in 2012 at the height of the eurozone debt crisis. But you get the picture here, right? It's, it's continued bad news from, from Europe indicating that we could well see the likes of Germany when we get— because look, we're at the end of quarter 3 here, so we're going to get German GDP data Not for a few weeks. We need the quarter to end. So actually, the first readings of quarter 3 GDP won't really come until the end of October. But as you can see on this chart, quarter 2 was negative. So this is German GDP here. So quarter 2, -0.1%. We did have a minus print last year, but you'll probably understand that an official technical recession has to be 2 quarters in a row of negative GDP print. So look, we're really worried. That Germany are in recession. And if Germany in recession, well then, you know, that's the, that's the, the core engine of the European economy. I'll flick back to the charts to talk about how this impacted on some other assets. Obviously the euro devalued, but in the end it did rebound a good half of that sell-off, and we've caught some key resistance at these lines that we've drawn up. So the Friday low and then the low the sort of double bottom back end of last week. So the 16th and 17th of January lows sort of coinciding with Friday's low. And it was that technical area that provided the stubborn resistance throughout yesterday afternoon. And we remain below that price point today. So euro weakness, as you'd expect. If you take a look at the DAX, it's not a dissimilar sort of pattern here. So German equities taking the biggest move to the downside. Let me just move a couple of these lines. So we had this low. I drew a box on this when the German DAX was selling off, off the back of the data in the briefing yesterday. I drew this box picking out the low from 17th of September, and we'd broken below the Wednesday-Thursday double bottom at 12,333, and that was the obvious target. We did actually slip through there before then kind of going through a bit of a messy consolidation. That Wednesday, Thursday low provided some good resistance late morning. But in the end, actually, as we drifted into the back end of the European session, we did see the DAX then move back up above that level. And indeed, overnight, we've gapped and traded up and opened right back up at the, the low points that we saw from Friday, actually. So the DAX almost reclaimed the whole move, and you might scratch your heads a little bit over that. I mean, why would the DAX recover so much of the move when actually it was the German data specifically that was the most surprisingly bad? So here's one sort of, um, potential reason. Um, let me take you back to the chart here, and I want to talk about German fiscal policy, a topic I know all of you, uh, love, close to your hearts. German fiscal policy. Let me show you something. If we look at the government here, and I want to look at the government budget, and what you see here on your screens— excuse me— is German budgets in surplus. And this has been the case for the last few years. You can see 5 years in a row, and not only 5 years in a row of surplus, the surplus has been getting bigger and bigger and bigger. And actually, 2018, printing at 1.7%. So this means that the— this is looking at how much does the German government earn. So what are the tax receipts coming in relative to how much does the German government spend? Okay, and the difference between the earning and the spending, this is your you know, you're either going to have a budget deficit or a budget surplus. Most, uh, sort of developed, certainly Western economies, are running with deficits. That's where they're spending a little bit more than they're earning. And this is the concept of borrowing today to then invest in the country's future growth. Okay, but Germany have definitely been taking a different path, and you could really say they haven't had a deficit since back in the crisis. And even right at the worst point of the crisis, their deficit was only -4.2%. You know, compare that to the likes of the US. The US almost hit -10% in the crisis. Compare that to the, the casualties of the crisis like Greece. Their deficit was more like -16%. But my point is, right, Europe is struggling economically. Europe is very weak. Who's the biggest economy in Europe? Well, it's Germany. And Germany are sat on this big fat surplus and are not spending it. They're not delivering any fiscal stimulus to try and stimulate economic activity in their own country. And if they did do that, then actually it would be a really quite powerful stimulus for the whole of Europe. And if Europe gets an economic boost, then, you know, it's a powerful stimulus for the world, actually. So Mario Draghi has been kind of very frustrated, particularly with German fiscal policy over the last few years. He did another parting shot yesterday in his final testimony before he steps down and gives up the position of ECB president to Lagarde. And yesterday again, he was quite vocal about trying to urge particularly Germany to just loosen the purse strings and start stimulating. And they've definitely got some money. I mean, there's a lot of politics in this. Why have they been— why have they got such a big surplus? I mean, it's quite natural, um, sort of German fiscal policy in the last few decades to be incredibly prudent. I mean, this is— Merkel is written all over this chart. This is, this is, this is Merkel style, you know. It's about being fiscal— fiscally disciplined and prudent. But the time for prudence is over. Germany's most likely in a recession, and the government need to do something about it. So we'll see as we go through Q4, you know, as we get that GDP print for Q3, which will be at the end of October, where we start to hear noises out of the German government that we're going to see some kind of stimulus package. Is this a reason why the DAX actually in the end almost retraced the full sell-off yesterday. So I think certainly something to look out for in the weeks to come, any German fiscal policy noises coming out of Frankfurt or Berlin, then this could well have quite a powerful effect on European markets, what, you know, across the continent. Okay, it's something we've been waiting for, so I just want to put that on your radar. And I need to talk about the Bund here, and I'm going to bring them and make this chart much bigger. And these are— this is German 10-year bonds, and I want to bring this onto a weekly chart to put things into perspective. Um, this, this market— let me just mark up these kind of big major technical levels, like the 2018 low, for example, down at 156.87. You've got the 20 Um, you've got the October low from that year not too far away from that. But certainly on the upside, um, we had caught some key resistance in quarter one, 166.83, and then we had a powerful move to the upside. Okay, now the ECB have just rolled out another rate cut. They've just rolled out a restarting of their QE program. Albeit only at 20 billion a month, but it is open-ended. So this means buying more bunds, and so that might drive the price to the upside, of course. That— but I mean, it's disappointing the amount that they've decided to restart QE with. And we've seen this big correction back lower here for bunds, but generally speaking, bunds are right up at the top end. I mean, if I go to a monthly chart, you'll see that once that loads, you'll see that German bonds are right up at the very top end of their all-time ever heights. Let's just put it that way. Once we've broken that 2016 top at 1.6895, this thing's just ramped aggressively higher. All-time ever, ever, ever highs. German 10-year yields into negative territory. You know, the remarkable scenario that Germany can borrow money for 10 years and get paid for it. It is a sign of our very unique times, this chart. But is this the top? You know, have German bunds— is this kind of multi-decade rally, is it over? And here's the thing to think about: if German— if the German government do roll out a fiscal stimulus package, and they might not, but if they do, well then that's bullish, right? So So you should expect German equities to benefit from that. You should expect safe haven markets to be negatively impacted. So you might see bunds moving lower off the back of a German fiscal stimulus package. If they go ahead with a big package, well, then they're going to need to borrow more money, which means issuing more bunds. So you might see the supply of bunds increasing. The supply goes up. Well, the price goes down as well. So that's a negative. For German prices. And then if this fiscal stimulus package actually works and generates some growth, well, then we should expect some upside inflation. And if inflationary pressures move higher, then, you know, you're going to find the likes of the ECB not needing their QE program anymore. And if inflation's higher, yields move higher, which means prices move lower. So there's some good arguments to suggest that if the German government roll out a fiscal stimulus package, you may well see a bit of a pivotal turning point for this bond market. And maybe we'll see things trending to the downside into year-end. And will we get back to that top from 2016, which would be the first key kind of price point from a technical perspective? So I wanted to just put that German situation onto your radars, you know, picking up from that bad data from yesterday. And what does it mean? And what might might that bring out of the German government in the weeks and months ahead. So, um, that's yesterday. The other thing from yesterday, just to make sure we cover off the two important moments, the other one was involving crude oil where we had the Saudis coming out. And let me just draw a box around the candle that I'm referring to. We had a sharpish sell-off around about half past 10, breaking the Friday low and then moving down and actually briefly moving below Wednesday's low from last week, but as you can see, it's recovered and we're kind of back chopping up around about where we were before the news. So the news was just that the Saudis think they'll be back fully online, fully operational, production back to where it was pre-drone strikes by the end of next week. Um, so that's the news there. Uh, right, let's have a look at the headlines. What's been going on. And here's a look at the Bloomberg home screen. You've got Boris, who's sort of featuring quite prominently, and that's because he's been talking Brexit, obviously, at this UN General Assembly. He met with Merkel, he met with Macron, he met with Tusk. Not very little news flow out of that meeting other than Tusk tweeting, no breakthrough but no breakdown, time is short. So that's pretty much all we got. So just suggesting that they met, they chatted, they didn't make much progress, but you know, at least it didn't, you know, at least the meeting didn't break up in acrimony. But obviously just re-emphasizing the fact that time is definitely running running out. One thing that Boris is going to do today— so it's quite a pivotal day for Boris because at 10:30 AM we'll get the Supreme Court ruling as to whether his prorogation, his suspending of Parliament, was legal or not. So they're going to make this ruling at 10:30 AM, so keep your ear to the ground. The speculator— I mean, obviously your pro-Remainers They're saying, well, Boris is gonna obviously have to resign, you know, if he's basically lied and misled the Queen into suspending Parliament. It's unforgivable, and he's gonna have to step down and resign. Um, Boris isn't gonna resign. Uh, there's no way. Okay, so don't— anybody hoping for that, um, I think are not thinking rationally. So what's going to happen? Well, Boris will have to be forced into reconvening Parliament. And you know, what will happen then? Well, I mean, we're almost into October anyway as it is, but you could argue it might give more time to the pro-Remainers to kind of work behind the scenes and on the backbenches to further disrupt Boris's sort of plan if it is his plan to leave the EU with no deal. So we'll see. But honestly, I don't think in the grand scheme of things it will actually change much. I mean, from a market reaction point of view, and maybe let's talk about that, and I'll bring cable into the mix here. We've had some dollar strength really from the kind of middle of last week in the end, um, and we had some dollar strength really because, well, you, I guess you would say that that FOMC meeting last week, um, showed that the FOMC had divided and that it wasn't a unanimous decision to cut rates again. And that therefore kind of introduces the idea that maybe, you know, the chances of more rate cuts— let's say a December cut— the chances might have reduced. And so a little bit of dollar strength. Yesterday we had a move lower for cable, more, I'd say, more than anything, in sympathy with the euro-dollar move to the downside. So a bit of a correlated move off the back of those eurozone PMI figures that were disappointing. And then it's been very flat and very sideways, and we're just waiting here, you know, what's the Supreme Court going to say, what's Boris going to say. In terms of the initial reaction, it's a tricky one. I mean, I'd say probably more than anything, you'll probably get sterling on the upside if the Supreme Court votes that the prorogation was a illegal. I actually don't think it'll be a massive event from a market point of view. But yeah, probably some upside just because, you know, the simple argument should be in the 125 handles a good target. That was key support on Friday. We broke it yesterday. I'd be looking there for that for a target on the upside, which isn't very far away. I mean, it's only 30 pips from where we are now, but perhaps a break up back above 125. And this is because you could argue if it's illegal, if Parliament have to reconvene, then Boris's ability to take the UK out of the EU with no deal is reduced potentially. But I don't see big fireworks off the back of this announcement. And anyway, they might say that it is legal, in which case, fine, we carry on. And we carry on. And what Boris is doing, he's timing a speech today from New York to try and put some more headlines on the spectrum to try and distract attention away from the Supreme Court ruling. And what he's going to say is actually a little bit controversial from the Europeans' point of view, because he's going to start to say that he thinks that, you know, we should— he's going to be very bullish about Brexit, and he's going to say, right, we should take full advantage of our new freedoms. And he's going to talk about how we should change policy in order to diverge away from the EU to form a competitive advantage, and how we should cut corporation tax, for example, to try and attract in foreign investment. We should relax regulation in certain areas, making— you know, what he wants to do is make it very attractive for US and Canadian businesses and students and, you know, technically high-skilled individuals to come to the UK to enjoy the benefits. Now obviously that's very bullish for the UK, right? But Europe aren't gonna like that. I mean, Theresa May's deal, part of that was a commitment to make sure that the UK stays aligned with the EU in, in a whole bunch of different areas. Obviously the last thing the EU want is Brexit, is the UK leaving. and then the UK, you know, diverging away from Europe, forming a significant sort of economic competitor right on Europe's doorstep. That's the last thing they want. So if Boris, if he is going to do what he says, then the chances of a deal before the 31st of October reduce. Also, the chances of a trade agreement being agreed after Brexit, I'd say again become way more difficult. So whilst Boris might be bullish and making all the right noises, and it will definitely, you know, the nationalists will love it, Brexiteers will be cheering in the streets, but actually I think it will make the ability for us to do a deal with the EU a lot more difficult. So we'll see. So expect plenty of Plenty of Brexit chat, certainly this morning. 10:30 AM, key moment, um, the Supreme Court rules, and then Boris is going to be making some speeches out of New York. Okay, all right, what else? Um, so Trump, let's talk about Trump. He's— Trump's in, in trouble, or is he? Um, there's so many times Trump has— the impeachment risk. I don't know how many impeachment risks we've had since he took office, but it's definitely record territory for a US president. So this is a new story, you'll probably have read about it already, but the Democrats have been saying that Trump has been using his office to try and influence the election next year. And what he's done is he's been— apparently, according to the Democrats, remember, of course they're going to say this— apparently he's been withholding $400 billion sorry, $400 million of military aid to the Ukraine. And he's been withholding it because he wants the Ukrainian president to investigate into something that happened a few years back when Joe Biden was vice president under Obama. Apparently, according to Trump, Joe Biden forced the Ukrainians into firing a prosecutor who was looking into the business dealings of a certain company in Ukraine who Joe Biden's son, uh, who named— whose name is Hunter Biden, happened to be on the board. So Hunter Biden has got business dealings in the Ukraine. One of his businesses was under investigation. Apparently Joe Biden forced the Ukrainians into firing the prosecutor. Now Trump's withholding aid in order to force the Ukrainians into investigating this. And obviously, from Trump's point of view, he wants all of this to come out into the open because Joe Biden happens to be one of his key challengers for the election in 2020. Um, so the election, uh, fighting has definitely begun. And unfortunately, the election's not for another 14 months. So, um, just strap yourselves in. It's gonna be an ugly fight. It always is when Trump's one of the competitors. So the point here is that Nancy Pelosi, who's the kind of head of the Democrats, if you like, she's always been of the opinion that, look, let's not go down the road of trying to impeach Trump because it will just fire up his nationalist supporters and it'll come— probably backfire. But actually, even she's now pushing towards the the idea that this particular situation has gone beyond any reasonable behavior and that maybe we should be moving towards some kind of impeachment scenario. So this is a story that's flared up. You know what, from experience, if we just look at markets and I said to you earlier, markets don't, don't care. They really don't care. We've seen these things happen. I don't know how many times. And yes, it's gonna be all over the headlines for sure. But unless Trump actually gets impeached— and I don't think that's even possible because the Republicans control the House, they control the Senate— so I actually don't think even if the Democrats want it, it's not going to be possible. So really, I think this is just headline noise. It's just part and parcel of this election campaign that's now up and running in earnest. So I don't think markets really care. So the S&P is chopping around the 3,000 handle. What the markets do care about is— sorry, I wasn't showing you my chart there. Here's the S&P, very sideways actually when you're looking at it back over the last week or so, a consolidation now. What they do care about is much more, you know, things related to the US-China trade war. And we've had some positive news on that overnight. This is why the S&P has just popped up through this 3,000 $33,000 handle. The news being that we had some kind of lower-level talks on this trade agreement last week, which was— now it's been announced is ahead of what are then more top-level talks which are going to take place in Washington next week. Okay, so we have another round of negotiations happening next week. Of course, just the fact that there are some negotiations is a positive, but you know how this goes. I don't know how many negotiation rounds they've had now. I mean, I literally don't know— 10, 20, 30. And of course, all of them have in the end— it's the kind of Groundhog Day where it kind of breaks down. Any hint of it breaking down, Trump starts getting aggressive on Twitter and then ramps up some aggressive threats on tariffs and then goes ahead and increases tariffs. And then the Chinese go, all right, fine, fine, let's start negotiating again. And the Groundhog Day re-begins. So at the moment, again, markets have become desensitized to this, and the S&P at the moment is just chopping around 3,000. Now, where is the S&P gonna go? Let's look at the daily chart, because what's the next big thing? Because we're right up here, we're right up here at all-time highs. That high in July is the all-time top, okay? We're right up at the top. And haven't we got these risks, you know, the trade war risk, isn't Europe in recession and all the rest of it. Well, central banks have turned very dovish, and that's certainly been the catalyst to take the S&P back to the top. But we've got quarter 3 ending, so we're gonna have quarter 3 earnings season, and that'll get going in October. And that'll be an important update to see just how corporate America is faring. But, you know, it's about the Fed Fed. Are the Fed going to cut in December? And the chance— I mean, looking at the meeting from last week, it's maybe not. And if the Fed don't cut, then this market is not going to stay at the all-time highs. The only reason it's up here is because the Fed is cutting. The Fed stop cutting, the market will not be up here, and we'll be way more worried about the risks such as the US trade war risk with China. Okay, so I say it's mostly about Federal Reserve where this market goes over the next 3 months. All right, just finally, just to cover off, I think I've mentioned everything I want to talk about. The other thing was— the other thing, I guess, to finish on, let's have a look at the data calendar for today. So let me just change up my screenshot here and have a little look. And the key moment will be in 15 minutes it's time where we're going to get more German data. So the German IFO number, um, the business climate, the, the— so the IFO expectations component is the most important. We're expecting 91.8, which would be a slight increase on last month's 91.3. I am going to very quickly show you the chart for this because it is a really important German number and we're nervous about it given the fact that, um, actually I'm not sure, do the— do Trading Economics cover this chart? So I've got a feeling they don't. All right, I'm not going to show you the chart, but it's definitely an important number and we're nervous it's going to be more bad news given what happened yesterday with the PMI reading. So keep your ear to the ground for that, 9 AM, most important data of the whole day. Um, UK Supreme Court ruling 10:30. World leaders arriving at the UN, that's going to be at 1 o'clock. So when they're arriving, this is when the press shoves some microphones in front of their faces and you can get some throwaway comments that might be important. So certainly any of the key Brexit players, certainly Donald Trump, the Ukrainian president, you know, what are they going to say about this latest scandal, all the rest of it this afternoon. Most interesting data out of the US is consumer confidence. This will be at 3 o'clock and we're expecting a slight drop from last month's figure. And then in terms of speakers, really busy week for monetary policy speak. So you can see here we've got some ECB guys and Carney's talking at 4:15 at the World Economic Forum. We want to see, you know, is the Bank of England going to cut rates in Q4? So that's the lineup for the session. That's it for the briefing, guys. Uh, enjoy your trading days. Thanks very much.