Hostile Brexit Talks But EU Considers Sweeteners

OK, very good morning, Tuesday, 16th of July. Hope you are well. A quick overview of what we're going to cover, talking, as you can see here, a little bit about Brexit. I'm going to update a couple of comments out of the Treasury Secretary on when we can be expecting further dialogue between the US and China on the trade talks. A little bit about the debt ceiling as well, with that looming in a couple of months' time. Some movement as well from Steven Mnuchin. RBA minutes overnight— what did they say? Any impact on the Aussie? And we've got quite a busy calendar for today, combination of a lot of Fed speakers as we were indicating in the briefing yesterday. You've also got Mark Carney speaking later on this afternoon, but more broader topics rather than anything explicit. But nonetheless, the governor will be hitting the tape. And then we've also got quite a few important economic data points coming out from the UK, from Germany, and from the US in the form— the last year of retail sales. So before I begin, let's just have a look at the overall charts this morning. Uh, the dollar touch firmer, the dollar index up about 0.1%. So I can see both major pairs slightly lower, underperformance arguably in the pound having broken through. You can see in the center top chart here the range that we're seeing in the Asia-Pacific session. Cable already moving down to its respective S1. And as you can see, both EURUSD and cable, as I'm talking right now, are printing fresh session lows. Elsewhere though, the other asset class is particularly quiet. US index futures pretty, pretty flat, very minor positive. Similar kind of situation, likes of Eurostoxx and the DAX. Gold and T-notes pretty much unchanged in the same case, at least for now, for Brent futures. And WTI crude only down about 14 cents. So if anything, I'd say a little bit of currency movement, perhaps a little bit of underperformance in the pound, which is unsurprising as, as we're going to go through some of the Brexit headlines. Also, as well, I was reading an interesting article on Bloomberg this morning talking about the month of August. And from a seasonal point of view, the pound does underperform. I think they were looking at EUR/GBP in particular in the cross, but for the last 5 years tends to be a generally a negative month for the pound. Now overlaying the economic situation with the political uncertainties, and, and it does make some sense of why we would be moving to the downside from a fundamental perspective. This is the headlines though. That we're looking at this morning. Brexit talks get more hostile as EU considers sweeteners to deal. Now, a couple things to be aware of here. If I run you through the main gist of the article, Stephen Barclay and the EU chief negotiator Michel Barnier, they were meeting last week, and apparently, just given the stance of the Tory candidates at the moment, both Jeremy Hunt and Boris Johnson, although one slightly more harder in stance than the other. Both have talked about their seriousness of being able to leave, um, with a no-deal exit if the bloc will not talk. And as such, again, this does need to be reflected into the pound as the timeline obviously shortens as we get closer towards that October 31st deadline. Now, a couple of things to be aware of here. Both candidates As we've been listening to these hustings between the two, Hunt and Johnson, both candidates for the prime ministerial role have promised to renegotiate the Irish backstop. Obviously, that's one of the most contentious issues of the entire deal and has often been the main sticking point, why we've remained at this impasse. They both, though, have reiterated in their leadership debates yesterday that the measure has to go. Tweaking it is not enough. Does sound rather familiar to where we were just a few months ago under Theresa May. And this whole— remember when she was getting these votes of no confidence in her about, what, 7, 8 months ago that failed? It was the ERG which were particularly prevalent, and they were talking about this idea of the backstop, but then we couldn't make any progress. And I fear now we're kind of going into a similar situation. Where does that kind of leave us? Well, this is the updated decision tree, and I was speaking to a couple of the, the newer interns yesterday about the outcomes for Brexit, and the point being is there is really not a lot of clear clarity over which one of these potential endgames for Brexit is going to really win out, because they're all fairly even. Whether that is A no deal, of which you probably assign a slightly lower probability of actually occurring. I think the split across the major banks— Goldman's has that assigned at about 15% at the moment, Nomura is up at about 30%. But obviously, general election, second referendum, a smooth orderly Brexit with a transition, a general election if we make it to 2022 is looking less and less likely as, as time goes on. But a few things here. The current status hasn't changed from the EU's perspective. They've said that the deal is, is not up for renegotiation. However, there are early discussions internally over a package of measures that would aim to make it more palatable in the UK so that the next prime minister has a chance of getting it ratified by a divided parliament. Now, the bloc is is wary of offering Hunt and particularly Johnson significant more than they gave May. You can kind of understand that because, you know, if you give an inch, they'll take a mile as far as the negotiation tactics are concerned. However, officials have said there is still some ammunition left as they held some concessions back when it became clear that Theresa May was unlikely to get her deal through Parliament. Brexit diplomats from 27 national governments in Brussels have been told to be on standby throughout the month of August should discussions between the two sides resume in earnest. And they aren't expecting significant movement until the second half of the month at the earliest. Second half of August, that is. It's definitely— it's going down, uh, again to the, to the wire, so to speak. But I think actually I, I personally think this headline may be a little bit misleading. Yes, current talks are fairly hostile, but it's the first time really we've started to hear about, well, potentially the EU may make some concessions. And the fact that they're talking about that now so early when the deadline is still months away, I kind of see that as quite a positive actually, although that's not reflected in price this morning. I'm talking about the endgame here. As much as I feel a no deal will not happen, if Boris or Hunt can come away with a slightly more improved version of Theresa May's deal, well then perhaps that's the best you're going to get. And maybe then, as it said in the article, more palatable for Parliament to then get behind and back so we can move forward with an orderly Brexit. Because let's not forget, the mandate of the government is still to deliver just that. Brexit. So I think that's actually quite a significant thing here that really isn't being looked at too much, the fact that the EU is considering, considering these sweeteners at this point. For the moment though, market seems to be taking its cue from the fact that, you know, economically the country is starting to feel, feel the squeeze in various different measures, certainly evident in the recent PMI series that we had. And now the kind of current state of play is one of hostility, given the fact that the EU at the moment are still not willing to renegotiate, albeit they then, according to unidentified sources, looks like they might well be. So perhaps a good strategy from the likes of Boris to push the, push the narrative at the moment. Moving on elsewhere, a few other things to be aware of. The trade war since the G20 has gone a bit quiet. Obviously Trump's been dealing with other issues like being labeled a racist at the moment. Given some of his recent tweets at the weekend about some of his opposition. But this is due to come back soon enough. The Treasury Secretary has said trade call with his Chinese officials likely this week, and depending on the outcome of those talks, all being well, they'll look to then meet again face to face. Trump earlier said China wants to make a deal as economy slows. Trump a little bit critical post-G20 about China not fulfilling its commitment to buy various different agricultural goods from America, of which China obviously imports a large amount of goods. However, China has said they have been doing that and they've been more than willing to do more, all being well, that these calls come out with a, with a positive outcome to continue to push the negotiation forward. So I would say keep an eye out for anything more that comes of this issue, but quite frankly, I think Trump's slightly more sidetracked by domestic issues given some of his recent comments that he's made, which have caused quite a, quite a sharp reaction in the public. The other thing as well, this isn't really being too talked about at the moment, but it's worth just mentioning so you are aware of it, but The Treasury Secretary again in the press talking about the deal to raise US debt ceiling is getting close. I think the, uh, by the numbers, we'll be expecting to hit the predefined debt ceiling in the US by not October or November, but actually I believe it's September time. So that's not too far away. This is kind of a regular thing that tends to come up almost annually when America gets close to hitting its predefined debt ceiling. What tends to happen then is that Congress will meet. What Steven Mnuchin is saying here is that there is no need really, or threat of a government shutdown, because that is often what can happen here, because those who want to be more fiscally prudent don't want to keep bumping the debt ceiling higher. But it almost is inevitable that the debt ceiling normally gets edged a little bit higher just to facilitate the ongoing working of the government in that respect. So what he's saying is that that's getting close, but a deal is— it will be in the making soon enough. Elsewhere, RBA, uh, I wouldn't say there's been a particularly sharp reaction in the currency overnight. I don't really think this changes how markets were positioned anyway. Remember, we've been seeing rate cuts from the Antipodean central banks now for some time, recent months. And the RBA said they're monitoring job market closely and to adjust rates if needed. So keeping open the optionality of cutting rates further, again, pretty much what markets were thinking anyhow. Um, but I guess the one thing to be aware of if you were trading the Aussie in the overnight session, particular focus on the job market and inflation in Australia. So if you ever get CPI data or jobs data, I would imagine that rather than these minutes, which by by default are quite dated. I would say the latest readings of which the central bank will take their direction from is going to derive from those two data points. So whenever you have those economic releases, I would say you want to be particularly cautious and aware if you're looking at the Aussie in existing positions, or if you look to trade the actual currency in the overnight session, that will probably see the biggest, sharpest reaction in the, in the Aussie. Quick look at the calendar because there are a number of big data points coming out today to be aware of. From the UK, we've got the unemployment rate and the unemployment change and the average earnings data. So all really need to be taken in as a, as a collective rather than one isolated figure to give you a real underlying picture of the situation. Now, if you remember, wages have been particularly robust in the UK despite these kind of obvious uncertainties and, and economic troubles being experienced at the moment. The fact of this, which is the UK unemployment rate, which is currently tracking at 3.8%. Now if you look at 3.8%, it's been fairly consistent the last two readings, and 3.8% is the lowest unemployment rate in the UK since 1974. So, you know, healthy amount of people in work contributing then to what has been a fairly robust print of late in the datasets related to earnings, which obviously is a, is a, is a positive. Its translation then into the fact that that mitigating that situation in 2017 of a disparity between stagnant wages and rising prices, uh, we've got now something which is more healthy in terms of real wage growth comparative to inflation. Um, so that's something to look out for at half past 9. Going further forward, you've got then the German ZEW coming out at 10 o'clock. Now, this was ZEW last time. It was a shocker last time this data came out. You can see it down here. Came in at -21.1. It was way weaker than expected, and it was a severe negative print comparative to the prior 3 months before. Uh, combination really of the intensification of the ongoing trade war between the US and China. Will Germany in particular come into sharp focus for Trump, given the nature of their export industry and the reliance on what has been, according to Trump, a weaker euro instigated by the European Central Bank. You've also got increased military conflict risk in the Middle East, and of course, this probability and uncertainty surrounding a no-deal Brexit have all been things which have kept then the forward-looking outlook for the German economy, as far as analysts and economists are concerned, fairly pessimistic. Now looking at the range, got a range here of ZEW on the headline of -30. Where would -30 put us? Well, that's definitely off the charts as far as the last 12 months are concerned. -30 is going to put us back down to— looks like here around the crisis point of the, the sovereign bailouts that we were experiencing. So we had the financial crisis recovery and then we kind of hit that low late 2011 into 2012 when we were seeing Greece, Ireland, Portugal and so on getting bailed out and the contagion effect and uncertainties at the time across the eurozone. So yeah, that would be certainly interesting, potentially leading to some more euro weakness, Bund strength if that was to materialize today. I think -14 is the range high. That really is not that surprising. I mean, that would come in still well below obviously the zero figure, which has been the case with this data set for a majority of the period of the last year. So I'd say a breach of the lower bound towards 30 or more would definitely be of interest for potential reaction. Otherwise, moving further forward, having a look at the US afternoon, you've got US retail sales, import and export prices. You've got US industrial production, cap utilization, business inventories. So quite a few things coming out. Probably the most interesting here from an economics or economy point of view is going to be retail sales and industrial production. Having a look at US retail sales, a few things to be aware of. Um, this is what the pattern has been like. It's been a little bit up and down. However, we have had 3 consecutive positive numbers. Um, one thing to look out for with retail sales, if you're trading around that data set, is it's not just one number. You've got month-to-month, year-on-year, ex-auto, gas, month-to-month, year-on-year. You've got revisions then to all four, so that's 8 numbers. You've then got the control group coming out. The control group is sales minus building materials, motor vehicles, and parts. And gasoline and food service receipts. So it's a fairly pure number, if you like, which is used to calculate the personal consumption expenditure component of what contributes to GDP calculations in America. So the control group is the one that most of the investment bank models look at in order to calculate future GDP expectations. Remember that Atlanta Fed model tracking at about 1.4% for Q2 US growth, comparative to 3.1% growth in Q1. It's also mimicking the same as what is issued by the government and how they calculate GDP as well. So the control group, keep a close eye out for that. The control group, I think retail sales expected at 0.1— excuse me— month on month, but the control group is expected to rise by 0.3%. Remember, to give you a bit of context, wages were 3.1% higher on the year in June, with the PC inflation running at 1.5% in May, representing a healthy rise in disposable incomes. Nonfarm payrolls as well, remember, at the beginning of the month was 224,000 job creation. So if anything, given that, that setup, you would think that retail sales should be fairly healthy. So the consumer part of the economy should be ticking over in the States. And obviously the market has been so infatuated with such a dovish Fed, given some of the other things that we've been monitoring. I think maybe this is— could be a little bit of a silver lining. So, you know, if we get a robust, better than expected breach of the higher bound, strong control group knocking 0.5% plus, on the month-to-month reading, and certainly maybe a little bit of further dollar strength. Perhaps we see yields move a little higher, just pressuring T-notes below their pivot level in the futures space. Final few things on the calendar, you do have the oil inventories coming up, the API, this evening, but you have a whole slew of speakers today. This is something we talked about yesterday, knowing your in advance who's coming out and when and on what are they speaking. So remember, go back to that crib sheet if you need it. I did tweet it, you can just find it on my Twitter account, one of the recent posts. Um, but you've got Bowman, Bostic, Kaplan, Powell, Evans, they're all speaking. Um, remember, some of them are just speaking at this Bretton Woods 75 Years Later conference. That really is lesser significant But some of them, like for instance Evans, who is a voting member this year, the FOMC, neutral stance, is speaking on current economic conditions and monetary policy. Always those types of topic or speech titles are the one that are going to be most relevant for what we look at. Um, final thing is earnings. We had Citigroup yesterday, um, as I understand, stands solid profit growth and a rebound in its struggling consumer operations. Uh, but trading revenues were weak and the bank reported tighter net interest margins, which I think is pretty much going to be the case across most of these big banks, of which we're going to get JP Morgan, GS, Wells Fargo, um, all coming out pre-market today. Also looking out for one of the bigger pharmaceutical names, Johnson Johnson, as well. On that note, I know this is a little bit small um, but I will share this in the, um, in the chat room afterwards. But basically, here's a running chronological order of all the companies coming out today. So Johnson Johnson and JP are up at 11:45 AM London time, so late morning. Goldman's at 12:35, Wells Fargo at 1 o'clock is, is your schedule for earnings releases, um, as per the slate this morning. Okay, that's it from me. I'm going to hand you over to Sam now and he can talk you through the charts in more detail. I'll catch you in the chat room and I wish you a good day ahead. Thanks very much.

Hi guys, hope everyone's doing well. Just having a quick look to start off with the pound, which is drifting lower here. It's pushing through the S1. For the day and turn around that area. Before the first test, we had a bit of support come in, as was the low of the afternoon of the 10th, and that's just broken on the second time of asking, at least on the half an hour candle anyway. Next key area to focus on, let's see if we can get through 125.20, would be looking down towards S2 where we had support on the same day, on the 10th as as well. And also around there, the 125 handle, not looking too good for pound, uh, euro pound. Again, after a decent enough day yesterday, pushing to the current high for now. So with the pound, a bit of pressure, uh, data not expected to, to be all that great. So just having a look to below where we're trading, S2 important, and then the low. And if I just move that above the camera from the 10th and the 9th as well would be pretty, pretty key levels. I think unless we were to really push above the, the highs of the day in this trend line that contains price, we're not really looking to, um, we're not really looking to, to go long, I would say. Euro-wise, let's have a quick look. Uh, range-bound, you have to say, stuck in, in this range. Those highs from yesterday were the high of of last week. The low, um, while chopped through a bit on, on Thursday, you could argue S1 could be a pretty important level. We did get a break of, of the pivot yesterday eventually on the XYZ time of asking. That offered a bit of resistance, but the push down, the breakdown was, was pretty limited. Pivot, I would say, still remains an interesting enough area, uh, 1320 and 1321 on the pivot. As we did have that resistance, what was previously support. So I'd say that's almost your line in the sand, but whether you'd want to get too involved, uh, in this before, um, you know, before a breakout of that range or not, I'm not necessarily too sure. So have a quick look here to see, uh, this range just coming in potentially just before the S1— so, uh, the, the trend line, I should say— the low from the 9th and the 10th. She's getting squeezed in. You've also got the low from the 11th as well around that point on the futures. That is 1.1303, so the 1.13 handle right on S1, or a tiny bit below. Quite a key level I would, uh, would have marked up there for, for the euro. Speaking of markets getting squeezed in, you can see gold is doing exactly that from the, from the lows and the highs. Not too much going on, and I would say that would would be the same unless we were to really get a decent break out of this. You can, you can see in the early session we did push higher, but very choppy on that low volume. You can see maybe the better opportunity could come if we were to, to break the downside here where we can just get in these higher lows, getting squeezed in. And maybe if we were to see equities continue to push higher or some overall dollar strength come back into the market, we could see a decent push lower, as we know how quickly gold can move. But for now, price just getting squeezed in and not doing too much there. One other currency to have a quick look at is the Aussie dollar, and it'll be interesting to see where we finish the day today. This trend line— I'm just going to remove the pivots quickly— you can see starting on the, the high of 2018 2018. That trend line broke yesterday initially, and then dropping that, that down, you can see we're almost coming back down to test that 7040, the level pretty much marked up along with yesterday afternoon's low. So quite a key point to have a look at if that was to hold. I know we had the, the dovish comments overnight from the RBA, from those minutes, which, yeah, as I said, were dated. But if you know, if that was to hold, it could be a decent enough opportunity to see, you know, further push higher. The dollar a tiny bit stronger today, uh, in, uh, in the European session. Uh, the yen feeling that as well, which has just come down to an area of support which you can see is— well, if it was to come down again would be that fourth test of the level we made back on the 12th. And the, the range trade, I guess, you know, this this morning wouldn't have been too bad at all. To the upside, I think you'd be happy to see this trend break. You can see we're getting squeezed in from the top and also the bottom as well. If we have the trend line on starting on the, on the low of the 10th, you can see that would also come to the low of the 12th and then potentially to this area right now where you've got the low yesterday, this morning, the trend line as well. So quite an important zone there for, for the yen. And then to the upside, you can see that getting squeezed in as well. Quick look over at oil, which started, uh, relatively well yesterday. We had that, that great break of the, the trend line from, uh, starting on the— what day would that be— Thursday. That broke through, led to a decent push higher, then came to the high that we had last week, which as we know, just making this chart longer time frame, you can see how important this was. And people were talking about, you know, getting, getting in the short there, and you know what a trade that, that would have been. We then led to a decent, decent break lower. So to the upside now, what was the, the lower yesterday morning around the pivot, 5985, pretty important level. And then to the downside, the top end of the 9th, so the, the API spike, you can see just a 30-cent below here. So you now got perhaps a new range forming, uh, for that, waiting for these areas around the pivot of 59.11. As it stands right now, I think might be, uh, the preferred trade. In the low volume, it does look like we've broken just this lower part of the trend that we did make from yesterday. You can see decent enough opportunity when it broke through and came back. And so I'll just be keeping more intraday, you know, watch on 59.37 and 30.39, where it was the initial low from yesterday. So maybe a further push lower if that was to go, but certainly the more important areas, it seems, pivot and 59.11. Quick look over equities, which on the open, on the cash open, did push lower. The failure to push above that level saw us drift back down. And, uh, well, I was waiting for the pivot all day and it just didn't want to come. Just didn't want to come down. And even when it got close enough, the reaction was, was pretty limited. So relatively subdued day yesterday for, for the S&P. We did have a moment post-cash open when the trend lines were breaking, and it's half decent opportunities to have taken on. I know it would be right on 2:30, and, and that breakdown was, uh, was held for, for a while. Uh, looking at this now, you can still see what was the pivot area that I was half interested in yesterday comes in around the S1. 3011 on the futures would still be somewhere to have marked up to the upside. You know, if you're not looking maybe into the back end of the session, we've got a trend line, uh, holding up from the all-time high. As a breaker, that could see a further push on. And then just a reminder those that didn't watch the briefing yesterday or see our strategy report, um, you can see that top part of the trend channel looking to come in. And obviously that's going to keep moving up the longer we don't get there. But today still around 30, 31. So just keep an eye on that should we get a further push higher. Um, whether we can, you know, get a test of that today or not remains to be seen. Potentially just having a new trend line here formed as well from the lows that we had, uh, back on Friday afternoon. So just keeping an eye on this price, just getting squeezed in a bit, but volume unlikely to, to really be there. Uh, any questions, as usual, please do let us know and we can get back to you as soon as possible. Euro as well here, just pushing down. The dollar just starting to strengthen a touch more as well. Have a quick quick look over at pound just to see how that's reacting. So you can see, found a bit of support on 20 before breaking through, and this was actually a previous high before the push higher that we had on the, on the temp. So an interesting area of support. Next level, 125 and the S1. Hope you all have a good trading day, and I'll catch you in the chat.