Is the US/China trade deal about to blow up?

Very good morning to everyone. It is Wednesday the 6th of November. Hope you're doing well. I'm going to talk over the ongoing US-China trade war, is the main focus for the briefing this morning. We're also going to have a look at the expectations around what the Fed are going to do in December and how that's been evolving. Also some commentary out of Fed's cap plan overnight and looking at the inversion of the yield curve. We've also had some German data, and then we'll look at the calendar ahead I'll wrap up my kind of half of the, the brief and then I'll hand you over to Sam. So back to, back to normal now, and then he'll look at the technical levels and some of the setups across the different charts. Kicking off though, as we always do, with the overall sentiment for this morning, and it's a pretty quiet open overall in the currency markets. I mean, the dollar index is trading pretty flat overall, currently down 1/10. So major currency pairs in the top left, EURUSD and Cable, pretty sideways action thus far in terms of since the close of Wall Street last night in the Asia-Pacific session. Pivot level just providing a bit of near-term resistance in the cable futures at the moment. Equity-wise, again, equally so, pretty, pretty tame open for European indices for the moment. The US similarly quite flat, as too is the US 10-year. Oil, slight loss at the moment, trading sub its pivot. and the $57 handle, $56.93. Not too much in the way of any new fundamental headlines there driving price, so we're going to delve straight into the main kind of topic and get things underway. So talking about this US-China trade negotiation that's been ongoing and trying to finalize this idea of phase one, at least, of looking to do various different things. And to start with, I thought I would go over a few key points that summarize, I think, the current state of play, and of which when I go through, I think you'll see that there's plenty of support to follow the notion that I think that it's going to be incredibly difficult— I still see— for this deal to get done to the point of which I think the market, given how it's now positioned, will be satisfied. What I mean is I think there's room for a significant disappointment if history repeats itself and the whole dialogue becomes undone at the last minute, which I think, given the points I'm going to run through, there's a fairly high prospect of that happening. So starting off, and want to talk about what the Chinese want. Kind of know what the US want, uh, what did the Chinese want? And a comment came out yesterday in a report from their state media talking about people familiar with the deliberations saying that Beijing has asked the Trump administration to pledge not only to withdraw threats of new tariffs— so withdrawing new tariffs, remember, they're due to commence in December— they've also asked to eliminate duties on about $110 billion of goods imposed in September. And negotiators are also asking to lowering the 25% duty on the $250 billion that Trump imposed last year. So they want no implementation of December, they want the rollback of what happened in September, and they want the rollback or lowering at least of the duties on the, on the quarter trillion dollars worth that was imposed in 2018. They are saying that the reason why they're asking for so much is because if you want China to continue buying large quantities of agricultural goods, and then most importantly, the issue that hasn't been tackled, but you want us to play ball on cracking down on intellectual property theft Well, then that's the cost as far as the US are concerned. Now, big problem if you're America because obviously tariffs, or as he's become known, the Tariff Man now, which is Donald Trump, this has been his primary weapon in this ongoing negotiation. So if he now is to start not implementing, or in fact rolling back and lowering of previous tariffs, I think ultimately this is too big a reversal for the tactics that's been deployed thus far, for a start. Now, obviously there are stresses on both sides of each economy at the moment. We saw that evident in the US trade data yesterday, uh, on Tuesday for September. It showed tariffs have hit both US imports from China fell 4.9% from the prior month to the lowest in more than 3 years. US exports to China dropped 10% to a 5-month low as well. So you could argue there's, there's some will to get a deal done given the consequence on the economy. But remember, for me, there's a much bigger narrative at play, and this is about Trump and the election. This is all part— this deal, not so much, I think, him so full focus thinking about its implications on the economy. It's more about popularity and getting the job done in order to secure a second term. Now, this does come with some political risks then, because by agreeing to lift the duties, um, that could backfire because obviously this has been the staple of his policy ever since the pre-campaign, campaigning period that we had in 2016 when it was all focused on the US getting a bad deal, China manipulating their currency, and all these different types of things. And so I think by agreeing to lift the tariffs, again, I think it's too big a step down from that narrative into what is and will remain a real staple linchpin of his campaigning going forward over the next kind of 12, 18 months, or 12 months, I should say, November Obviously, actually, is the US elections on the 6th or the 8th next year? It's pretty much year to date as far as where we are at the moment. The other thing was there's been a bit of talk about where could this be, this actual talk of— given the APEC meeting was cancelled because of the civil unrest in Chile in the last few weeks. The South China Morning Post reported this morning that Xi Jinping's Brazil trip may be too soon for China to sign a partial US trade deal. Um, this is quite key then because Beijing has not agreed to a stopover in the US on way to the summit, according to a source, with details of agreement not yet finalized. The removal of US tariffs remains the sticking point on the Chinese side. So again, it might be that we don't even get to the definitive nature of finding out where they're going to go to sign this deal because it might all come undone even before then. But for me, where the deal is going to be signed is quite symbolic, particularly on the political front. Now, Beijing saying that Brazil trip is too soon— one of the areas that has been tabled, although it's been pushed back by the Chinese, is signing the deal somewhere in the US. Now, interestingly, one of the areas where it's been put on the table is Iowa. Now, Iowa for me is particularly interesting as a shortlist or being a candidate on the shortlist of potential locations. So this is a look at the, the Office of the United States Trade Representative. If you were to go on their website, you can see basically definitive detail about fact sheets on different areas and locations within the US. Now, Iowa is particularly interesting because it's the second largest exporter of agricultural products in the entire United States of America. And so this is particularly important. Why? Because, well, if you go back to 2016 when we had the previous US election, Donald Trump won this area with 51.1% of the vote. Hillary Clinton received 41.6%. 7% of the vote. Trump carried Iowa by the largest margin of victory of any Republican candidate since Ronald Reagan in 1980. Trump enjoyed the support of working-class whites in the agricultural industry, of course. And, and what's the main product that they produce in Iowa? Soybeans. And of course, we know the back history with that and what the, the ongoing tensions have been and tariffs and purchasing of goods between the US and China. So I just find it incredibly difficult then for Trump to meet the conditions of what China want in order to get this deal done, from the political point of pandering too much to the Americans, but also making that concession if it were to be in an area like Iowa, which is that whole understanding of protecting American farmers and so on. It completely goes against that. So that, in addition as well to the fact that, you know, tariffs are seen as such an important enforcement tool— think about this as well— one of the main things that the US has wanted, and particularly Robert Lighthizer, the trade secretary, has said before, is that we cannot remove the tariffs because we really don't trust the Chinese are going to follow through with their commitments on various different things. By keeping, you know, keeping the weapon on the table, if you like, that helps keep China honest that they'll follow through and see and implement then parts of their side of the deal. All of this being said then, whether it's the rolling back and meeting China on its tariffs, whether it's the political risks that I think are too severe for the US to meet China on their request, the loss of enforcement and the leverage The fact as well that equities are at all-time highs, which we know Trump then tends to become a little bit more assertive with the rhetoric because he almost feels like he, he feels like there's a bit of room for maneuver in order that the equity market can come back a little bit and that would be okay given how elevated they are at the moment. So he might feel a bit more relaxed on that front. You've also had US economic data where whether it's non-farm payrolls on the consumer side, in the non-manufacturing ISM yesterday, which was improving, new orders are up, employment constituent improving from the prior month. Does this give Trump then a little bit of support or put his mind at ease that really, well, he can't meet them in the middle, not at least at this point, and therefore do these talks all come undone? Um, I think it would probably— in my mind, if I was an advisor to Trump, I'd want to push this out a little more towards the middle of December when those December tariffs are going to kick in. I wouldn't want to be signing any deal right now because I'd want to keep the, the, the pressure on China. Uh, China talking up a bit of a big game at the moment. I'd want to test that, take it down to the 11th hour as normal, part of the negotiation process. So that being said, I think the markets are overtly confident about the outcome of this, and if the trade deals do start to break down, then I would anticipate some selling pressure to come in to the equity market and that to initiate a degree of some risk-off trade. Now with that being said then, a couple of other things to have a look at. Obviously a lot of people looking at this equity market now having touched record all-time highs thinking, well, we're at these levels, are we entering overbought territory? And just having a look here on this chart from Bloomberg, you've got the MSCI All Country World Index, which isn't quite at the peak that we saw at the beginning and around Jan, Feb of 2018 before we saw that correction in the global market. But the 14-day RSI Bloomberg are looking at is more overbought than it has been at any point since we had that big sell-off at the beginning of 2018. You'll remember this elevation here when equities are really rallying, one in a one-dimensional kind of move, was when the corporate tax cuts got underway. And that was in 20— end of 2017 into 2018 when we hit that original all-time high. So I've also read this morning a lot of people talking about the put-call ratio is incredibly high at the moment. All these things indicative that people are at some point positioning themselves for potential downturn in the equity market. And I do think that this trade war will come undone, and that could be then the catalyst then that creates then quite a severe correction, as per what we've seen of course on many times gone by. Remember, if we put the S&P back onto a daily continuation chart— give me one moment, I'll, I'll bring it up so we can have a look. Let me just quickly remove some of these studies just to make the chart a bit clearer. Transition. So this of course tells, you know, a very big story of many different fundamental catalysts. This was when the corporate tax cuts came in. The market was kind of overheating almost with its forecasts and Fed tightening policy risks started to come in, and we saw a big pullback. We then had the biggest pullback of all, which was this time last year. We're in the midst of that sell-off because the Fed was still tightening or signaling to do so, uh, the escalation in the trade war, the risk of a no-deal Brexit, political populism across Europe, multitude of different things. Then we had the recovery, and then the Fed started to cut rates and we started to see the episodes then. Fed cut, market fall. Fed cut September, market fall. And now we've got to where we are at the moment, of course, at these all-time highs. So I do think there's some downside that will definitely come. I guess the net— the, the clearest near-term target here would be a reversal back down. I'm talking more medium term. If this trade deal does come undone, then that 30, 23, 24 area in the futures market would put us back to that previous double top that we had that defined the price action at 2019. That would be the first place. Any further, more meaningful pullback, then I guess you've got to be looking at then those previous areas from May of 2019 and the top of around the late 2018 price action. But I'll leave Sam to go into that. I mean, that's definitely much more longer term rather than the intraday environment. So yeah, that's my latest kind of take on the, the US trade situation with China. I just think it's just a matter of time really, but I think you've got to be a bit more responsive now to headlines as they come out because now things like the general election for the UK— an interesting conversation I had with one of the guys on Monday was that, you know, we went through a period of many months looking at cable and it was really whipsaw price action, a lot of hearsay and rumors driving the price. Whereas really now I think cable is pretty boring. And what that does mean is I think we do get a bit of a reversion back to perhaps a little bit of a look at the economic data if anything of substance comes out. The Bank of England, I think, is largely a bit of a non-event tomorrow. But overall, I think really it's— unless there's a major campaigning error on behalf of predominantly Boris Johnson, then I think it's all pretty quiet till we get up to that election date on December 12th. So I do think then that means that the macro hierarchy of key influencing themes has changed a little bit, the composition. Brexit's dropped off, and I think trade war's right back up there at the top. Where do we stand at the moment in terms of the market's expectations on the Fed side of things? Well, this kind of reflects that notion that I think if the trade deal did blow up, that there could be a decent move in reaction. Because at the moment, going off the language adopted by the FOMC in the most recent meeting, where Powell was kind of signaling that this is the end of the recent, um, rate-cutting cycle, um, expectations are very much that rates will remain where they are when the Fed next meet on the 11th of December. November 11th, the day before that election takes place. The expectation here is for 94.8%, so only 5% of the market's pricing in one more cut. Now what does that mean? Well, Fed's Kaplan, he did speak last night, yesterday evening, late in the US session. He said a steeper yield curve, a sign that Fed rates are now appropriate. And two things: one, who is Kaplan? So for those who need the refresher, here's the hawk-dove kind of crib sheet of the FOMC, Kaplan is a non-voting member but is a leaning dove. So it does make that commentary quite interesting on two— twofold. One, not only is he more neutral to dovish stance, and typically that's slightly more of a hawkish comment, but Kaplan is going to be a voter as of the calendar commencement of 2020. So what typically happens is we get closer towards the end of that year and we get the rotation of the regional presidents, Kaplan will be a voter. And so what he says now can be important for factoring in, even though he doesn't have a voting right in the December meeting. The other thing is, um, you remember a couple of months ago everyone was getting almost obsessed with the inversion of the yield curve, particularly with the calendar timing of the fact that equities were almost peaking as we were going into the beginning of October. And on a year-to-year basis, the beginning of October with this inversion of the yield curve kind of obsession that the market had meant that people were thinking, well, maybe we get a repeat of what we had in Q4 of 2018. And they couldn't be more wrong. Anyone who was calling for that— and I know Bloomberg are really pumping that at the time— but me and Sam, remember in the briefings, we were, we were very much of the opinion that the inversion of the yield curve was massively overhyped. And thankfully for our call, it's proven to be true because that 2.10 spread now, the yield curve is back at levels last seen in July as yields continue to reflect the notion that, you know, that was very much overdone in terms of its initial pricing as the economy, as personally the data points that we've had. And as per now, the Fed pricing on the rate cycle side has kind of eased back into more of a neutral stance, and the yields are reflecting that environment. Final bit of news I just wanted to touch upon, and I'll hand you over to Sam, was we had German factory orders this morning, um, possibly has helped a little bit of the risk appetite this morning as I've been delivering the briefing, just a little edge higher in some of the of the global stock futures. The DAX managing to get its head back above the pivot in the futures market. Germany's industrial orders rose by 1.3% month on month in September, above expectations, which were the 0.1%. Now, this is particularly important because the German economy, of course, has been under quite substantial stress of late, and this was a substantial beat within that reading, albeit does tend to be a fairly volatile data set. It was the first monthly increase in factory orders for Germany, though importantly since June, and boosted by a rise in both domestic and foreign orders. So it's likely to alleviate, at least near term, any of that concern that was mounting for that particular country. Okay, quick look at the calendar. What else is there to come then for the session? Well, this morning you do get the final readings of the various PMI numbers on the service side. But remember, these are final readings, so are unlikely to have much in the way of substantial market reaction. Elsewhere, Eurozone retail sales, non-event. I'm not quite sure why this is bolded. I've never in my life seen Eurozone retail sales move markets, and so I would not really factor that in if you're looking at any euro-related trades. So strategies for this morning. So then that takes us into the US session, uh, pretty light actually. Labor costs, productivity numbers coming out for Q3 in the US, and then you've got the oil inventory numbers. So what I'll do is I'll post the APIs from last night into the chat, and then while Sam's going over the oil chart, he can bring you up to speed with what was the numbers from last night. Speakers, um, quite a few to look out for, a variety of ECB and Fed ECB in the morning, Fed in the afternoon. One of the most interesting on the Fed side would be Fed's Williams, who is a current voter, speaking at the Wall Street open, 2:30 London. And then Fed's Harker, who will be a voter next year, is speaking towards the close on Wall Street. And for any fixed income traders, you've got a $27 billion 10-year note auction coming out of the US Treasury later. Other than that, I would say I'd definitely keep an ear out for any developments and rumors about what the latest is in regards to the ongoing US-China trade talks. As I said, I do feel that that is one of the major risks now that could well turn around this market, having traded at all-time record highs, particularly in the equity space. Right, with that, I'll leave it to Sam now to finish things off. And I'll see you in the chat room. Thanks very much.

Hi guys, good morning. We're all good. Just having a quick look over stocks actually to begin with and bring in the DAX along with the FTSE actually starting the morning quite nicely, just pushing half hour into the open here, and we have gone above yesterday's highs. And we're keeping a watch on, on pretty much where we're trading now, if we can confirm a break above there or not. You can see was the high from both Monday and Tuesday yesterday. So having an attempt to get in above there. And of course, if we put this on that longer chart, you can see this is the highest the DAX has been for, for a very long time. So keep, uh, keep a watch on that. We're almost into uh, with the last few sessions, a bit of a mini range as well. You can see again early hours in the Asian session, we came down to test yesterday's low, which is the overnight low from Monday as well. So key point to keep a watch on there to see whether we can hold, uh, or not above. If we were to drift lower, of course, just be aware that you are coming back then into the middle of the range again. So a couple of potentially key levels with the way we've been trading this morning, quite well respected trendline here in the DAX. And you see 1, 2, 3, 4 tests of that. So it might be worth later on to see if we do drift lower how that reacts as well. The pivot has already acted as a good level of support once broken through, but if we were to come back down again, it could well get choppy. But at the moment, DAX enjoying life, and so is Eurostoxx, and that's helping to drag the S&P up to towards its pivot. You can see similar, uh, move, obviously not as, not as big, however, as European stocks as well. Key level to the upside, 30.78, a bit of a breakdown area from yesterday post-cash open and also the evening high as well. So just 3 points above where we're trading currently. Looking again longer term at this market, and we haven't quite had a test back of what was, uh, the, whether the post— actually, no, it's not the, the 30th of October, uh, that would be 3054, which is of course not too far away from where that trend channel was. So still something to keep a watch on that if we were to have a couple of down days and see how that holds out as a good line in the sand for, for the buyers and sellers to fight over. So let's let's just put that on and, and see where that would come in. For now, let's remove the pivots, bring in the trend. Give me one sec. You can see here, let's go now a bit lower down. You can see that, yeah, coming in around sort of 3060, uh, or so as well, which is also not far away from the high that we had on the first. So still one to keep an eye on. There's a couple of nice levels as well in the euro which I, I would have as lines in the sand as well. I'm just going to bring in here on a 60-minute chart, just looking at the, the previous high that we had on the 21st. You can see we created this nice trend that, uh, from the 24th we then broke through, and the 30th came back to find support, and the 5th, uh, which was of course yesterday before that breakdown. And that's certainly somewhere I would have marked up on any push back towards there. You can see, yes, it looks now mid-range, but certainly been well respected over previous times. The low that we had yesterday, um, you could argue a decent enough area from the 16th, although it was quite choppy. We're just trying to push above those previous lows that we had on the 25th and 29th. We are above that on the stock— on the, the spot market, so just be slightly careful of getting in too aggressive obviously, yes, we've got the hurdle now where we've just, uh, attacked here on the 30th. So that's somewhere I would still be looking at for a point of resistance. But the key line in the sand I would have as that trend line there. Moving on to the pound, it is boring, I have to say, at the moment. I'm waiting for opportunities to, to get in, and it's not really delivering as of yet. From a technical point of view, let's have a look, see if this trend line hasn't come into play just yet, which would be just above 129, the highs from yesterday evening. This is looking on a 60-minute, so quite a bit of resistance around there that I would be focusing on, to be fair. And then maybe from the lows to see if we can get anything, uh, squeezed in as well. But yeah, I think opportunity-wise there's better ones out there. The pound at the moment, probably not where my focus is going to be until we get some further developments And that of course could happen, uh, from today onwards. But for now, I'd be looking elsewhere. Main mover yesterday, gold. Decent push to the downside. A couple of trend lines broke. Lows of, uh, the, the week, uh, and last, uh, back end of last week broke as well. 1504 key level, nice breakdown. And we came down to, to test some of the lows that we had from the back end of last month, which you can see just looking at this whole area. Is such a key zone. And gold is, is a market where it still doesn't know where it wants to do— what it wants to do, shall we say. But at the moment, if we can have a strong dollar and positive trade talks, it does have to reprice. This is whether that can last or not, I think, will be the determining factor. But as a line in the sand where it could potentially get a slightly bit more ugly, $1,480, the lows that we had back on the 11th are going to be key because a break below there, while you've got some possible levels— 1476, that low that we had from the 1st of last month— would be an area to keep a watch on. With gold, the way it can move after, you know, strong day to the downside, don't necessarily get in, uh, get too aggressive looking for those shorts. We've come a long way, so there could well be a slight retracement in the mix as well. Pivot looks to me market could be quite a nice area. 1492, that famous 1492 level, decent little breakdown area from there. Also the pivot, um, and not a bad place perhaps to get the, uh, continuation down from there. Might as well get a fib on that level as well. Oil, just to wrap it, uh, you can see, uh, we had a bit of a build last night from the chat, 4.6 mil Cushing and also Bill Gasoline. However, decent draw in distillates too. There's that 9:30 candle, hardly anything, hardly anything off that. And a quiet day has to be said for oil yesterday. However, just where we're trading now, quite a nice level, previous high of yesterday before we pushed higher, similar time to where we are now. So expect a reaction point around here. If that was to break through, then those lows from yesterday would would be the next key level to target. And also, we've come with a couple of these markets where we have made recent highs, worth just having on these potential trend lines. And you can see actually, we're on the 15-minute now, we've got quite a good test of that 1, 2, and almost that 3rd there. So definitely something to, to have on there for oil as well. Any questions, as usual, please, uh, do let us know. Quick run through that calendar again. As, as I'm saying, those retail sales numbers unlikely to move things. Uh, some data coming out shortly, which we know is always one to keep an eye on for the euro. Remember that line in the sand. A couple of US numbers later before oil. But this week in general, uh, looking to be relatively quiet. So I wouldn't be looking to, to trade, uh, too much. Let the market come to you would be my advice today. Hope you have a good trading day, and I'll catch Catch you all in the chat.