Javid out, Sunak in - What Does This Mean For Markets?

Okay, very good morning to everyone and happy Valentine's Day. So just a quick heads up for the fellas out there, don't forget to stop off at the petrol garage on the way home, pick up some cheap bottle of plonk and some flowers for your missus. You can thank me later for the reminder. But just having a quick look back to markets, then what have we got on the agenda for the briefing? So a bit of an update on the virus. We're going to talk about German GDP that's just come out, and that's the precursor then for the eurozone number. And then we've got what happened surprisingly yesterday, which was the stepping down of Sir Javid, the UK chancellor. So we'll have a little talk about what does that mean. Potentially for UK assets and the UK government and Brexit. And then there's quite a busy calendar for today, so just to run through some of the data points and so on to look out for, and then I'll hand you over to Sam to look at the charts from a technical perspective. So starting off then, just quickly talking about the virus. Quite interestingly, Hubei, so the main kind of epicenter, if you like, of the, the red blob— so if we were to zoom in here You probably know the lay of the land quite well now having looked at this a number of times. So there's Wuhan just on the right-hand side. Reported cases were up about almost 5,000. Remember, it was just around 60k yesterday, but the actual death toll has been revised down. It's not as if people have been magically revived back to life. Actually, they just lowered the number, so still obviously quite questionable These numbers aren't really accurate, we all know that. They're kind of rough guidelines to go with, but the idea here being that if you're actually looking at the sensitivity of markets as of today to this, it's still relatively benign, I would say. Yesterday, a little bit of a sell-off, but if you look at those US equity charts from really what was the pattern of price activity from yesterday, other than the morning sell-off that we had Soon as the Americans came in, we just started rallying back higher again. And I do think that there are, you know, from my experience having gone through, say, the sovereign crisis, does kind of reminiscent of this similar type of price action where different geographic regions have different interpretations. And certainly for America, where there's these primaries going on, there's Trump, obviously lots of activity as per usual. There's economic data that's been pretty strong, there's corporate earnings coming out. You know, unless the number in America of these cases, which, you know, if I just flip over my screen, remember USA had quite a few cases initially, right when the outbreak was beginning, and that number really has not changed one bit. And so, for the American market, I think the psyche there, as per generally, the reason why I mentioned the sovereign crisis a few years back, was that you'd get this big kind of maybe European reaction to a subject matter, the Americans would come in, and unless really it was getting to the point of mass escalation of an issue, they were just so much more focused on their domestic kind of information. And I do think that's a little bit the case at the moment. It's kind of this, this situation in China obviously is meaningful, but as far as the Americans are concerned, and I think the price action yesterday kind of reflects that. It's just they're focused on other things, and on the pecking order of that hierarchy of the most market-moving factors, it's clear and present, a danger, but it's not the biggest one. And these other more positive things are beating it out at the moment. So still to be monitored, the, the coronavirus. But again, as I said, looking at global stocks as a whole summary, as a kind of a collection of indices, generally we're up about 1% overall. We're heading for the second weekly gain. So despite the kind of usual regular intensity on this subject, global markets, you know, barring the exception of some of the mainland perhaps, but even that, the Shanghai and Hang Seng up again overnight. Only the Japanese market was a little lower in the Asia session. So moving on, what have we had this morning? There's been a couple things. If I just quickly flip over my chart, we actually have had already the German GDP figure and came in at zero. But if you remember the chart that I was showing you from the graphic that I had in the, the macro menu report that I issue on a Monday, at that point in time the analyst expectation was for -0.2. Remember, we was talking about in previous briefings this idea of the second kind of period of contraction in 3. Well, actually then, 0 is pretty good, not, not so much of a bad thing. I mean, obviously, logically speaking, Germany stagnating is not good, but comparative to how downbeat and bearish generally people have been on Germany, it could have been a lot worse. So actually, when you look at the, the EURUSD chart, if I quickly just flip over here to the EURUSD currency pair And if you go to 7 AM when this data came out, there was close to zero reaction. And if anything, if you look at it on a shorter time frame, the euro went up. And I think that's fairly reasonable in the short term. Overall, I don't think it really detracts from the trend that EURUSD is presently in. And if I put EURUSD back on a daily continuation chart, remember what we were looking at yesterday? We were basically— had confirmed the break of that summer low in euro. And we were talking about, again, this EURUSD chart is completely unaltered. So the, the rectangle boxes that we've got there are the same we've had for a number of days. And you can see how technical the market is. You know, you have these little blips, let's say, of isolated information, but the overall narrative hasn't changed at this point in time. The fundamentals are still that the dollar strength and euro weakness. And so then it's just about being patient. And as per that line at the 1.0852 here in EURUSD, which was those previous highs that we had— I think this is what Sam often refers to as the, the Macron gap up on that first round of the French elections back in April of 2017. We've hit that to the tick. And so again, just patience if you are holding that medium-term position. All things being equal on the top level, those dynamics for this currency pair uh, have not changed. And then here we are down at that point. So a good hold to these levels if you were, if you were in that trade over a slightly longer time frame. Um, this does lead us up then to the eurozone number that's going to come out a little bit later on this morning. I don't think there's going to be too much emphasis on this, to be honest. Having had Germany at flat, I'd be expecting this broadly to be in line then with expectations to remain probably around 0.1 from a range perspective on that piece of data, the flash GDP coming out of the eurozone, the range is flat to 0.2. So if we did get a flat reading, well, if we got a surprise and a negative reading, not sure statistically if that is even possible given the German sitting right at zero. But if we did, then, you know, a retest down at the lower bound of the range that's been in play since the overnight Asia-Pacific session on the euro could lead to a bit of a rundown an extension down to the S1. Okay, moving on, quick look at the UK, uh, because I remember I was delivering a lecture yesterday when this actually came out, uh, and this was a bit of a, bit of a shock really, because I was talking this time yesterday about how Sajid Javid, Dominic Raab, these types of characters who sit in the most influential seats in, in the cabinet in the UK government were pretty safe it was supposed to be a bit more of a formality for them. Absolutely wasn't the case for Sajid Javid, apparently kind of cornered by the PM and, and Dominic Cummings to fire some of his staff in order to more align basically Sajid Javid's own personal Treasury team with that of the Prime Minister's economic advisors, to bring them more aligned. So I, I would imagine then so Dominic Cummings can have more direct control over exactly what it is that they're doing, and the Treasury is a lot better equipped in terms of the size and depth, let's say, of the department in that sense. So what you would want then is Sajid Javid on board, but obviously he was reluctant to fire some of his staff, stuck by his guns, and so he resigned. So what does this mean then going forward? Well, a couple of different things. His replacement is quite key, uh, and the impact. So let's talk about the replacement first, which is this chap here. You probably would recognize him if you were semi-plugged into the political debates that were happening on TV. He deputized, if you like, for Boris Johnson in those leadership debates. You remember the first couple of rounds we had on ITV and BBC, you know, Boris didn't even turn up. That was how confident he was. He sent in his kind of, his next in command on the televised stage, and I'd say Rishi Sunak did a pretty decent job. I don't think many people were actually that aware of who he was. He's only 39 years old and he's risen through the ranks pretty quickly, only coming to kind of front bench positions over the last couple of years. Who is he? Well, he's a former Goldman Sachs employee. I haven't actually managed to see what exactly his role was, so I don't know whether he was an intern or whether he actually had a bona fide role of seniority or not. I can't really tell you at this point, but the key differences here is, is Javid was seen as a fiscal hawk, whereas Sunak is seen much more aligned with Boris and Cummings, giving his stance on Brexit. Sajid Javid was a Remainer, whereas this chap here voted to leave. His voting history in terms of all the different parts of legislation that we've had to do with Brexit and other debates in the lower house. He basically has been an ardent Brexiteer, supports reductions in corporation tax, cuts to capital gains tax. He's gone on the record in favor of infrastructure investment. All of these things then would be much more aligned with a government that would mimic then a little bit more of an approach of fiscal stimulus in a Trump-esque style in order to see, you know, the economy flourish. The opposite then of a fiscal hawk, which would be tightening the belt to make sure that you can afford these changes. So, um, as per usual with this type of chap, I mean, obviously people who voted for Brexit in Middle England were voting for, you know, Parliament to represent the normal man in the street. So just like Boris and all the others, this chap went to one of the most expensive prestigious private schools in Britain, studied at Oxford went to Stanford University, and he's married the billionaire daughter of the Indian oligarch of Infosys. So yeah, just like you and me, a nice representative of the man on the street. But I'll leave my political persuasions aside. The main thing that this does mean though is, what does it mean for markets? Well, this is the yield on the UK 10-year government bond, and actually if you see a bit of an uptick here, it's quite interesting because ultimately yields rising to their highest since January after Javid left. You know, this is that idea, this notion then that Boris can start kind of changing the game a little bit under the apparent direction of Cummings and look to tie everything together. And again, having everyone on board with that same view where they can pull the strings from one direction one place, I think, is, is quite strategic in that way. Um, okay, going to have a quick overview of the calendar and a few things to, to cover off. We've already talked about the data forthcoming in a short while at 10 o'clock. Going into the US session though, it is pretty busy today. You do have US retail sales coming out, they're your major 1:30 data release. You've then got industrial manufacturing data from the US business inventories. You've got the preliminary University of Michigan sentiment number. Then for any oil traders, you've got the Baker Hughes rig count as well. Pretty light on the ground in terms of speakers. We do have a BOJ member speaking London time at 10 AM. You've got Fed's Mester, a voter leaning hawk, speaking late afternoon at 4:45 PM London time. In terms of some of the equity movers for this morning, We've had AstraZeneca and RBS out of the UK. Just having a look at some of the, the actual movers here at the open. RBS has seen down about 2.7%, AstraZeneca down about 3.4%, um, Renault down about 2.6%. The outperformer this morning, EDF, is up about 7%. Um, one final interesting comment as well that was just made a short while ago. Bank of England Governor Mark Carney, even though he's outgoing I do think it was quite interesting in the sense that he said, um, central banks may have to look through one or two quarters of data due to coronavirus impact. Is seeing UK business confidence rebound, some firming up of consumer confidence. The thing I thought was quite interesting about the Carney comment where was that even though he's outgoing, I think that that's pretty much a tactic that will be deployed by most of the central bankers, so the ECB, the Federal Reserve, and so on. This idea that these central banks have to look through 1 or 2 quarters of data, meaning then that the likelihood of any near-term policy changes or tweaks, I would say, is probably minimal because it's only then that they've got to see then, well, what is the underlying performance in the economy once you kind of X out the impact and the repricing in of the coronavirus. So yeah, just thought I'd add that point in. Okay, I'm going to hand you over to Sam. Just bear with me one moment. Okay, hand you over to Sam. I'll wish you a good weekend. I'll see you in the chat room. Thanks very much, guys.

Good morning and happy Valentine's Day to everyone. Have a quick look over how things are going. Let's get started with stocks. Overnight Asia drifted higher, China finishing up for the week just. Um, so let's have a quick look at how we've, we've traded. You can see late last night, and this has actually been the, the way these markets have traded in some— there has been some decent moves into the, into the close. And yesterday you can see after we did break higher we came back to test what was the previous high of the day, and, and that's acted as a floor to a move to the upside. So keep a watch on that around 3372. It was what we were saying yesterday, there's a decent line in the sand for bulls and bears, and you can see once we go above it, the bulls took over. So for me, that's, uh, again, the line in the sand today. Hold that up. We're just trending lower from the, the high that we've got, so keep that on. Let's get a little trend line on there, although not quite yet the, the free test that you would like to see. Just keep a watch to see how, uh, how that holds out. Put this onto a 15-minute chart. Let's get a couple of lows in the mix as well. 3380, you could argue that could be maybe a short-term floor, or at least a level of interest to, to have marked up. And then you're really looking down towards 3360 if that pivot was to go. I'd say that would be another area to consider. The low that we got to yesterday, just about, uh, reaching, uh, the, the high that we had from the 10th, albeit not quite. And those really be the levels that I'd focus on. Same situation for the Dow and the NASDAQ as well. Gold yesterday, as we said, started, uh, well, pushed higher and then was really choppy in the range. And this would be still the, the lower part of that that I'd focus on 1575.5, keep that marked on. And then the, the highs that we just couldn't really get through at all— I was doing a trade review yesterday around half 3, 4 o'clock, and we were saying that it was looking like this level was going to hold, and it held again at 115. So definitely had that marked up to the upside, 1581 on that. Worth noting, Fridays this year have been the worst day of the week for stocks, and that could be helpful for gold to push to the upside. And just bringing this into the bigger picture, it is quite a key resistance zone going back here to levels not traded since the— well, other than yesterday, of course— the, the 4th of the month. And then above that, $1,585 could be the, the level to target as well. I know we're not near the low at the moment, but if we were to push down again, stocks pushing higher could be the reason for that. Probably worth us getting on this trend line again. You can see here on the 12th that both the, the morning and the afternoon before hitting it again not too long ago around half 7, it's guiding price quite, quite nicely. So if we were to break that to the downside, you could see a quicker move lower. The currencies, well, as we know, euro has been pushing lower again today. You have the pivot with an area of resistance from a previous day, i.e., yesterday. That's acted just so well, really, hasn't it? I mean, look at, you know, if you go back to yesterday, fantastic. Uh, you then break the pivot in the, the afternoon on, uh, the— what day would that be? Wednesday acts as a good resistance level. Tuesday, you don't quite make it, but give or take a 1 tick or 2, and that holds up fantastically well. And previous days, you can just see what a what a point to basically go short. If it hits the pivot, you're underneath, go short. Or if it's above and you break below it, you go short as well. And you'd be very, very happy today, or well, every day really. We're in a bit of a range, so you gotta, you know, think about that, that pivot level as a place to go short to continue the trend. If we break out the little range that we're in to the downside, of course start thinking about bigger moves and mark up the the level from, uh, Macron's gap. As you know, I quite like to keep saying that, uh, there as well. So, you know, not too much going on now. I know you've got the data coming out in not too long, uh, that could really be the main driver here. So that's something I would keep an eye on. But pivot for me looks pretty good. If that was to fail, which it hasn't really in a while, then you could get a quicker rally. I know it's a relative small range still, but 108, uh, 86 could be the level that that looks to come into as well. The pound, what a day yesterday, uh, for the bulls. Is that going to continue or not? I think moves like this, working the Fibonacci, seeing if there's any potential levels to get in lower down. If there was one that comes in around the pivot, 130.24, that should certainly be of interest. We went through a couple levels just below that yesterday. Around 130, and that would be ultimately where we close the week. This is what I want to see. Can we confirm that we're going to push or, you know, break above here? Um, and if not, then I think we do push lower ultimately. But if we can drift lower down to 130, I know it's 61 ticks away. I think from a medium-term or, you know, couple-day trade perspective, that's a lovely area to consider to get in. Trend line from the lows as well would match up quite nicely with that. And of course, if we close the week below, not only is the trend line broken, that key support, as, uh, would then potentially turn to resistance again, and we can push lower. To the upside, the high of— let me just get this on— almost reached yesterday, but the high of the 5th, that's somewhere to have marked up as well, 130.84. Finishing up on oil before quick looking at DAX, what it's doing on the open. 50/50 is, is my line in the sand. Uh, didn't quite make it yesterday morning, uh, finished the week above there. You know, you'd be very relatively happy to still be long. Whether you want to hold that risk over the weekend or not is another question. What you'd be really happy with is if we can get above $52. That would be really nice for any oil bulls. If you're, you know, bearish, if we can get back below that 50/50, fantastic opportunity maybe to get short. To target some of these lows that we've already had this year. Uh, looking intraday at the little range that we're in, it's, it's, you know, markets open up relatively quiet. It's almost waiting for— sorry— something to, to happen. Price just getting squeezed in here from those lows. A breaker of that is potentially an opportunity, uh, or a break of the upside as well. But range-bound trade, this may not happen really until the afternoon. Quick look at the DAX to wrap it, uh, quiet, trending lower from those highs, much like the US equities as well. Let's see if we can get a bit of a trend on there from that high. It's respected enough, little false break, uh, on the open, understandably. So keep a watch on that, a break above there, and it could lead to another, another push. And unbelievably still, that would be another all-time high for DAX. What can stop, uh, you know, this market, uh, and let alone the, uh, the US equities as well. But a couple levels below to obviously have marked up as well, the lines in the sand for the DAX. I mean, I would argue this is as good as any here, 13,712. Uh, be looking at that as well. Any questions, as usual, please do let us know. Good luck to the guys in Stage 2 today, trading competition. This is where heroes are made. There's no prizes for coming second, apart— well, there is a prize for coming last, a nice wooden spoon, but we all know it's all about getting that first prize. 20 contracts limit on each product, full futures, likely going to be a bloodbath, but I hope everyone has a good day and I look forward to catching you all next week. I'm on the mic.