Macro Update & Bank of England Preview

Okay, very good morning, Thursday the 6th of May. Hope you're doing well. And a quick wrap-up of what happened last night, the Asia-Pac session, some movement in the Aussie on some Chinese comments to be aware of. And then look ahead for the day, Bank of England meeting of course, and this prospect of tapering, what might that mean for the pound. And then also going to look at the, the kind of afternoon ahead. You have got things like US jobless claims, we've got the Scottish and UK local local elections happening. Are they important? Are they not? So a couple things for us to discuss, but let's just start as we normally do with the charts. And in terms of the close on Wall Street, a little bit mixed once again. The Dow up about 0.3% comparative to the NASDAQ. Tech suffering again yesterday, so we continue to kind of seesaw there. NASDAQ 100 futures down about 0.3%, the S&P broadly flat. So let's kick it off there and look briefly at the charts in the stock— in this index futures. In the S&P, you know, we were looking at this yesterday, the respect of that trend line that we had had going back to the middle of April. That level at around 4167 continues to remain one of significance for the moment in terms of short-term market direction. At the moment, we're consolidating beneath that line and also finding a bit of resistance here near term on the pickup as European traders come in at the pivot level. So between that area on the upside, 67, and the low seen during Asia PAC trading hours down at 4151. So we did trade a little heavy at around 3 AM overnight. I'll talk about that in a moment. But the Australian-Chinese rift picking up a bit of further intensity, that did weaken Australian stocks and the Aussie dollar overnight, which we'll review in a moment. But that move very short-lived, as it has been in the Australian products as well. The NASDAQ has been the general underperformer of the week, so let's just have a look at how things are looking there. And again, that key level we've been having a look at overall comes in at around 13,650, as you can see here from a technical point of view, being in play really through April, May. The market did come up, uh, actually at the cash equity open yesterday at that level. But as you can see from that wick, quite extreme volatility there. So even though technically that looked good for obviously the retest back up to these levels here for the kind of test, and then for the short entry back down using that key level, uh, as the, the top of that recovery move seen yesterday, very difficult to— I think we actually in actuality get hold of given how whippy the market was at the point of where the potential entry would have had to have been Uh, but nonetheless, you know, there's a stop-loss region, um, just above and running it down on the, on a daily price activity, looking to target back down to those previous lows. And coming out would have offered a degree of a fairly decent risk-reward on that trade. So the NASDAQ, we continue to keep an eye on. Again, it has kind of struggled so far this week with the general kind of value versus growth, uh, play that we've seen. Otherwise, elsewhere in the major currency markets, in terms of the DXY this morning, that's trading pretty much flat. In terms of EURUSD, the one technically that we were keeping an eye on yesterday was here, which was that kind of run through on the trend line and then that horizontal support area going back to resistance in mid-April, support seen on the 22nd The trend line as well was being well respected yesterday, and we were kind of squeezing down into that price point around the 120 handle. But we have now traded above there as of late US trading hours, and we've used that area now as a bit of a linchpin for support. And although I was feeling a little bit more bearish in continuation of that trend, we have seen a decent move back here And so we're now on the, the flip side of that trend line, which might help support that price going forward. Now, an important level here for the euro, and obviously mirrored in regard to the, the dollar index as well, and some of this recovery we've been seeing of that April sell-off. So as long as that level holds, might well provide a decent floor of support there for, for EUR/USD as a pair. In terms of cable, obviously much waiting for the Bank of England now to to come out a bit later. As far as sterling is concerned, for the time being, as you can see here, in a bit of a consolidation phase at the moment. It doesn't really strike me as particularly interesting right now until we hear from the Bank of England, which I'll, I'll talk about in, in a moment. Gold in the commodity space, and then a quick look at oil. Again, just kind of pinching the chart a little bit to look at a broader range. Um, you know, we've kind of gone in these, these sections here of consolidation at the beginning of April, a break up consolidation here between $1,763. So the $1,800 upside has been really capping price. We're trading at around the R1 at the moment, uh, on the uptick. We're up about $8.50 already, uh, in, uh, the yellow metal in the futures space. So on the upside, just be keeping an eye on that range high and $1,800 psychologically, which has been a good level of resistance so far. Which would be about $7 above the current price. And then with oil, a quick look here, um, kind of explaining the, the story of what we've had. This was Tuesday's price action, restricted around $65.83, and then the API inventories came out, which was a bullish report, drawdown of around 7.5 million, prices popped higher. We We had a slightly deeper draw, in fact, with the DOE, but obviously largely priced in given the kind of prepositioning built on those expectations from the bullish APIs. So failed to really get our heads above 66.62, despite the brief look up and around yesterday's R1 level. And we just kind of faded that move and now finding some good support down seen around the 65 handle, which was the low seen on Tuesday, yesterday, and in the overnight Asia-Pac session. So as far as the setup as the chart is concerned, at the moment we're exactly back to where we were on Tuesday at that resistance point. Um, and so 6583 to 65 is really the range that we're looking at now at WTI for the moment. So really I'd want to see these areas perhaps respected for the moment, either playing that range accordingly or looking for the break, pullback, and then the kind of classic entry to then follow the prevailing kind of range move, which has been $65 to $66.62 for the moment, but without— not expecting any real OPEC or energy-specific catalysts at this point in time. And so I'd be looking at a range there for, for the time being. Quick look then at some of the headlines and things to be aware of. I did talk about Australia briefly, so let's just quickly have a look at that. Hong Kong equities were generally higher overnight. Japan actually led the region's gains. Remember, they were coming back from a holiday, being off for the first half the week in last— Japan and China. Shares in Australia, they did come under pressure. Chinese officials announced a formal suspension of the economic dialogue with Australia. Now, this has been going on a long time. However, as far as the Australian dollar and their local market is concerned, obviously China is the strategically important trade partner. So deepening rift between the two nations really doesn't bode well for, for the Australian economy. But this has been going on a long time. So a couple things here then, and just really that main reason is we, we came down quite sharply in the overnight session. However, we've already reversed pretty much three-quarters of that move, and I think it really is down to the fact that this is just the next kind kind of evolution of that rift rather than something particularly shocking or new in that respect. So for the moment, market a little bit spooked overnight, just generally overnight. The liquidity volume is quite thin, tends to exacerbate the move. Things have steadied kind of since. Just having a look at the Aussie dollar here on a slightly higher timeframe. For the moment, we are still respecting what really is a range between 77 at the lows, you can see, been in play the last 4 weeks or so, to the high that we've seen overnight around 77.59. So right now doesn't seem particularly interesting, but if we get about 15 pips higher, yeah, I'd be interested to see if we respect that, that overnight session high or not. Preferring, um, the kind of quality of the, the bottom end of that range, given the respect that it's seen at multiple occasions on the 77 and psychological handle, rather than perhaps the short up at 77. $1.0759 if you're looking on the range trade. Um, so that was the Aussie situation overnight. And then let's have a look at the, the Bank of England. That's obviously quite a main talking point of today. And Bank of England watchers look for signs of tightening ahead. And so what we're basically looking at with this meeting today is focus is going to very much fall on the Monetary Policy Committee opting to slow potentially gilt purchases from their current rate of £4.4 billion a week to allow purchases under their asset purchase facility to run basically rather than wrapping up in October, early November, to the end of the year. Now again, this would be tantamount to tapering, and I think that, that kind of word has almost negative connotations as far as market reactions are concerned. The Bank of Canada, we obviously saw a big pop in the CAD currency after they decided to taper. I do not think that that would be the same case here for the Bank of England, and that's mainly down to the fact that the bank has explicitly said that a taper is likely. And so much of the kind of mainstream expectation here is that that will happen. So it's more about not so much withdrawing stimulus rather than just tweaking it. Let's just slow down the purchases and let's just draw it all out to the end of the year so that there's— it's active for a little longer, but we're just kind of using less force in the volume of what we're buying. So in this sense, it's more of a tweak to the taper, I would say, to that respect. As far as policy is concerned, for interest rates and the actual QE program size, they're going to be unchanged. That will be unanimous. The other thing, though, that this particular meeting is the alternate ones where we get the latest monetary policy report forecasts. So this is when they tell us about what they think about the 2-year horizon on growth, unemployment, these types of metrics. And if you think about the last time this report was released was back in February, um, we've had quite a, a strong improvement in terms of continuation of the vaccination rollout. This has led to then an adherence to the proposed and sticking to the government's roadmap for the reopening of the economy, all going ahead so far, touch wood, as planned. And so as far as these projections are concerned, we're probably going to get a GDP upgrade. You're probably going to see things like in terms of unemployment will likely reflect a lower peak in the kind of post-crisis pandemic employment figure. So things basically reflecting a better situation than where we were just a few months ago. The nuance there, as far as the Sterling reaction might be concerned, will be about, well, how aggressive are those projection changes? How bullish are they about the growth pickup going forward through the reopening, particularly as we go through May, June, which is the kind of the main sequence of then ending the lockdown that's been in place? And then what does that look like in the future? On the inflation side of things, I'm not looking for too much material change there. But obviously inflation, as much as seen across the world, seems to be picking up in the coming months. So again, Bank of England midday, we'll look out for that initial announcement. And then there's going to be the virtual kind of conference with, with Bailey that will kick off an hour after at 1 PM. And so yeah, I'll be on the live feed to go through that with you guys. And then as far as the calendar is concerned, what else is there today? Pretty quiet morning, in fact. The one thing I just— one chart I did want to have a quick look at was the DAX. And we've just obviously gone through the— what we're going through, the Eurex open and futures trade. So Deutsche Börse not open yet, but we will open I'm filming this just through 7 AM. I was just going to have a look on the daily chart on the, the DAX, what I thought was quite interesting yesterday. A few different points here. For one, a trend line from late October, the retest in late Feb, and the respect that we've had earlier this week when equity markets globally just came under a bit of pressure back on, on Tuesday's session. And we've just seen a good respect of that. We've moved back above that colored rectangle, which I think was a key area which helped add weight to the sell-off that we had on the 4th. And so now I'd be looking for perhaps a decent amount of support here, having pushed firmly back through that in yesterday's session. But on the upside here, on the recovery, you can see this 21 DMA has really capped some of the price activity, in fact, over this week. So Monday and Tuesday. And if you to pop a horizontal line there, that also was an area of support to price through the week prior to that, or last week. And so on the daily chart, I think the, the DAX, just to be aware of on this ongoing recovery, could find a bit of resistance up at that level. The 21 DMA has been relatively good actually over the, the period of the last month or so, having acted as a nice support with that, that horizontal technical support as well at 14,406. on the prior occasion. But that is it. So otherwise, the final thing to mention is just about, um, on the calendar, what's happening this afternoon. You do have the, uh, US jobless claims, so expected at 540. So continuing to show generally an improving situation, uh, on the employment side in the US, uh, having decreased now for, for a couple of weeks down to around the mid-550s. So not expecting a great deal of market reaction to that, to be quite honest. And then the other thing is we do have the UK local elections. I would say with that, definitely much more of a media than market focused. Would not be anticipating any type of sterling reaction on the back of that event. Definitely much more Bank of England focus. And then you also have the Scottish election. where a lot of the focus there, um, will center around the composition of lawmakers and specifically then how that composition favors a potential new push for a vote of independence. Now, ING analysts have suggested the impact on the pound would be very limited given regardless of the result, they do not expect an imminent vote. And in fact, a vote on independence, if they should so, um, want that to happen, will not happen for a number of years. So it's not a near-term threat at this point, but will be no doubt quite a talking point to be aware of. Speaker-wise, to wrap it up, you do have, aside from Bailey speaking in the post kind of statement from the Bank of England, you've got one Fed speaker of note, which is Williams, who is a voter, speaking at 2 PM London time. Interestingly, yesterday you had a whole slew of speakers from the Fed, and that's quite normal in terms of reaction function as they try to manage and reassure markets given the Yellen kind of wobble that we saw on the prior day where she was talking about potentially higher rates and those comments that she walked back. And so today, you know, aside from Williams, you also get non-voting members Kaplan and Mester speaking. And from the ECB, de Guindos 11:30 and Schnabel at 2:15. So all those speakers centered in the afternoon US session. Okay, that is it. I'm going to leave it there, let you guys get on. If you are watching this on YouTube, you've made it to the end. Well done, and hope it was useful. Don't forget to like and subscribe to the video. It would be much appreciated. All right, have a good day, guys.