Markets await ECB Interest Rate Decision

Hi guys and good morning. Thursday the 12th of September, just gone 8 o'clock here in London, and it is ECB day. The guy on my right-hand side, Mario Draghi, his penultimate, uh, meeting, uh, interest rate decision meeting, uh, with the ECB before he stands down, uh, and Christine Lagarde takes over. Of course, he is standing down on the same day as Brexit is supposed to be happening the 31st of October. So we'll, we'll have a look over, uh, his latest, uh, well, his upcoming meeting, what's on the agenda, what's expected, and we'll go over some scenarios for what could happen. Just gonna have a quick summary of, uh, of the markets going into trade as we are now. If we have a look at the S&P, just bringing that into picture, while just drifting lower a bit this morning we did push higher overnight, hitting 3,000 in late trade before— in the early hours of the UK morning anyway, pushing as high as 3,020. Just this morning, however, we have had a slight bit of, uh, risk off here. As you can see, Bund pushing higher, breaking that trend that's been in play for the last couple of days. Gold as well, back now above 1,500, uh, trading at 1,500 0.08, and T-notes as well back above its pivot and high of the day. So, uh, very much last night was a, was a case of, you know, stocks were pushing higher, all seemed well. However, this morning just coming under a bit of pressure, and you're just seeing the DAX here of course opening 12 minutes ago, already filling that gap. So in terms of people trading that, definitely a key one to keep an eye on. If that was to, to keep going, uh, well, you can imagine US stocks have got a repair some of those gains that we saw last night. What was the reason behind it? Well, your man Donald came out to, to save the day for stocks again, it seems, even though they've obviously been on a decent journey anyway. But tweeting last night, at the request of Vice Premier of China Li He, and due to the fact that People's Republic of China will be celebrating the 70th anniversary on October 1st, we have agreed as a gesture of goodwill to move the increased tariffs on $250 billion worth of goods, 25 to 30%, from October 1st to October 15th. Now, this delay in tariffs basically has been taken as positive. You know, China made some concessions in the previous day. So while this small concession, if you like, is not going to be the be-all and end on it's the end of the trade war as we know it, uh, it was enough last night to send stocks higher. And having a look at the S&P, you can really see since we broke above that 2945 area, it's just been a case of waiting before we hit that 3000, which we did of course in late trade last night. At its highest, yes, uh, this morning we were only that 0.32% away from all-time highs, which is, uh, it's quite incredible considering we have only had one rate cut and the trade deal isn't even complete yet. So really here pushing higher after this technical break, and then of course we've had some decent trade stories since then, most notably last night. However, it is starting to get a bit of an unwind, and I was actually on the, the way into to the office this morning looking on Twitter and people just weren't buying it, to be honest. And I saw a few tweets saying I'm going to sell tonight, I'm going to sell tomorrow. And well, maybe overnight wouldn't have been the best trade possible, but you can see now we are starting to just unwind a touch here. Also last night, and we're just seeing the, the dollar weaken a bit following this increase in volume, you can see the euro of course we'll come on to the ECB later, pushing to its high. And the pound in my middle here as well doing so, that helping gold. We also saw Donald Trump attack the Fed again, nothing new there, but, uh, his comments last night: the Federal Reserve should get our interest rates down to zero or less. We should then start to refinance our debt. Interest costs could be brought way down while at the same time sustainably lengthening the term. We have the great currency power and balance sheet. The USA should always be paying the lowest rate. No inflation. We'll come on to that later. We do have inflation coming out. It is the only naïveté— I guess that's how you say it— of Jay Powell and the Federal Reserve that doesn't allow us to do what other countries are already doing. A once-in-a-lifetime opportunity that we are missing because of boneheads. Um, it's not surprising. Of course, the dollar initially on these these tweets didn't really weaken too much, to be honest. But we are seeing a bit of weakness ahead of, um, the ECB coming up. And of course, uh, with the ECB now expected to lower rates, Donald Trump wants a bit of that action and the Fed to take, uh, what, further cuts into consideration next week. Uh, of course, today as well, not just about ECB— I'm just going to switch over to the calendar here before we go over that, that stuff. We've got at 1:30, so the time when the press conference is starting. So any euro-dollar traders, certainly one just to be aware of. Just though, as, as Draghi does start reading out the statement at 1:30, you've also got the inflation numbers out of the US, uh, as well. So those figures both expected for the core and the, the straight inflation at 2.3. Having a look at this for the, the core number. Just going back, well, here you've got 5 years. You can see it's just been solid. It's been solid above that, uh, that 2% or on 2%, really going back to beginning of 2018. So going pretty well there. The expected figure to be another increase from the previous month, so up to 2.3%, and then not far away from, uh, the 10th of August last year where we had 2.4%, which has been the highest for quite some time. So last month coming in 2.2, beating expectations. This month expected at 2.3, and certainly along with that press conference, just something to be aware of. So over the last couple of days, we've had obviously Trump start to pick up or ease on the trade talks. We've had the easing of Iran sanctions, or the thought that they're going to do that. And we've also had yesterday OPEC cutting 2020 oil demand at the same time. So oil just coming under a bit of pressure yesterday. Obviously had the, the DOE as well. But, and again, you can see this trend line helped push this, this move lower. This has must been left on from yesterday, making the initial test just before the DOE, then we break through. And I was actually delivering a lecture at 1:30, 2 o'clock, and we, we saw these, these sort of comments come through that were just reported there by, uh, by Reuters. And, and we have really since then— well, we're now trading at 56, but started to perhaps just top out. And we, we do have the, as well, uh, today the, the JMMC meeting. So again, oil traders, I'm sure you'll be you're keeping a close watch on that. And over the last, well, few weeks, I think it's a 6-week high we made, uh, on, uh, on Tuesday, up towards that, that key level from, uh, the beginning of— or end of August, I should say. So not necessarily 6-week high, a couple-week high, uh, up at, uh, nearly $59. So we not, you know, not getting too carried away here. I think you know, these, uh, these sanctions. Trump trying to get oil price down again, you know, he does— it's anywhere near $60, it seems he wants to come out and start talking down price. And OPEC cutting 2020 oil demand as well, just adding more weight to this move to the downside. So certainly intraday, I think for now I would be preferring to look for places to, to get short. I actually do like quite the look of the And I guess it falls quite nicely on the pivot today. You've got previous support from the, the 9th, resistance on the day before, well, the, the Friday before. So coming in around 56.50 for me remains quite a key area that I'd be focusing on. Your line in the sand almost, if you want. Any, you know, real push higher, I'm not going to say that is today, but just keeping a close watch on this trend line retest as well, which, you know, if it was to happen anytime soon, would be coming in around that R1 and those previous lows as well. So oil traders, couple of levels to, to be aware of there, um, just after the 2020 cut. Moving over to the ECB, so today all about the, uh, the, the 12:45 interest rate decision and then the 1:30 press conference. Draghi's penultimate, uh, meeting. I've put together a couple of— let me just drag this into picture here— a couple of scenarios to, to keep it simple. Obviously we'll go through this, uh, ahead of 12:45 and then the press conference. And if we have a look at the, the bigger picture just to begin with, you can see the euro, every time we've tried to recover over the last few weeks and really months. We are then met with some dollar strength. You know, Trump has tried to weaken the dollar through his comments. It has had no such luck, and the euro has come under significant pressure each time. Yesterday we had a technical break, no more than that really, pushing us to the low, breaking through all support levels. It reached— reaching the bottom of that initial pennant as well, and we actually just come back to retest that now. So worth again keeping an eye on. Whether you'd want to get really too stuck in before the announcement or not, I'm not too sure. But anyway, I've put together here some scenarios. Uh, the, the base case at the moment is, is between 10 and 20 basis point cut. Uh, I mean, my personal view is, is that we're going to get that 10, um, rather, rather than the 20. So the fact that we are in between, just off the, the idea that maybe they, you know, come out and say 10 and everything else is as expected, I think we all get a bit of euro strength from that. Obviously no cut is very unlikely and we, we get above 111 on the spike if that was to come through. A 20 basis point cut, I think initially we break those lows and we look back down towards that, that low of the year depending on what else has been said. So of course, uh, 1:45, 12:45, we're going to get those announcements and you know, you could have a scenario where they do a 20 basis point cut and a no QE package, and then it, it conflicts off that. But just if everything was to remain equal, this is the scenario that I would be looking at. So if I was to hear 10, I'd be preferring to be looking for a bit of euro strength, just on the basis that we're in the middle. Probably about 15 is, is the, the sort of the estimate, if you like. Uh, QE package So again, we're— it seems that we're pretty much bang on priced in for €30 billion a month for 12 months. So therefore, if they were to delay it, then we're going to see some euro strength come in. So similar to the idea that if they were not to cut and the delay, well, we get that high very quickly. And really, we're probably looking at, well, I'd say 112 over the coming days as well off that. So therefore, $30 billion, uh, 12 months, pretty much exactly where we would be trading. Maybe an initial unwind or some ultra-dovish bets, but pretty much remaining where we are. Any more than that, $40 to $60 billion, you're going to see a move lower off of a very dovish reaction there. More QE than expected. And also the, the idea that there's no time limit on it, I think, would be quite a dovish reaction if they weren't going to put a limit on how long this QE package was, was going to last. Like I said, the 12 months is the consensus. This would also be seen as relatively dovish. A couple more to, to go through here. You've got the, the best dovish scenario. This is where you break that low of the year, 20 basis point cut, 30, uh, or more than 30 billion QE package, no time limit on duration. We get the low of the year quicker than you can say Bob's your uncle. To the upside, best hawkish reaction, and this is again that, uh, above 112 eventually, I would say, is, is a no-cut and delayed QE announcement. Uh, my personal view of, of what I expect will happen— let me just clear the text up— I, I think he will initially disappoint a touch. I think we're going to get the, the 10 and the 30. I think we get close towards that R1 and, and those, those highs before some dovish comments, downgrades of growth, press conference, and then we drift back lower. And then I would say over the coming days, maybe before the, the Fed meeting, I think we get a retest of that low of the year. Of course, you've got the other factor of that inflation number to take into consideration. I just think we'll have initial hawkish reaction before it turns dovish, would be my view. Having a look over as well, what's, what's made them come to this, this moment where they're looking to cut rates. We can see here, obviously via Trading Economics, just having a look at their, their recent data points that they're going off. Uh, what we've got here, that the GDP has been struggling, so we're looking potentially for a downgrade on this. Hasn't been above 1 for, well, for— here we're looking, I mean, here since 2010, which is, which is pretty crazy for that, uh, GDP growth, last one coming in at 0.2%, not looking very good there. You've got the inflation number, nowhere near there, 2% or just a bit below target. Last time we were there was 12 months ago, and then funnily enough, I mean, beginning of the year, 12 months ago, uh, we were thinking this time is actually when there's going to be a rate increase, a rate hike. And now, uh, obviously we're in the situation where we've been pushing lower inflation is low. Will we see any downgrades on that? It's expected. So again, if not, hawkish reaction would take place. Also the manufacturing numbers, uh, just bringing this into the picture, obviously the other two are more important, but we're in that contraction phase and it's not looking too good. Again, at lows not seen really since, again, what we're looking at, 2012 as well. So not, uh, not too good. However, you've got some positives. The unemployment rate in Europe is is now almost back down to those 2008 lows. So it has been improving to the downside here quite nicely. But overall, the picture and everything I would take into consideration, uh, we're going to look for the cut. Growth isn't great, but to be honest, like most central banks, you know, their last meeting, uh, where they were more on a wait-and-see approach, you then had the Fed that have come cut. The RBA have cut as well, so following suit, you could, uh, you could argue that. Uh, just going to bring in here— I think you should be able to see this. If not, I'll put it in the, the chat later, but it's also on IMG's, um, Twitter feed. And if you don't follow them, you know, I would absolutely recommend that you do. They're, you know, fantastic ahead of central bank meetings, just putting together their base case scenario crib sheet. And you can see they're actually going for for a 20 basis point cut, which is absolutely fine. They believe it's going to be perhaps a bit more dovish than is expected. So their base case, they're looking for the 20 basis point cut, looking for the $30 billion over that 12 months. And it's a good way of just, you know, looking at what part of the market is going to be thinking here. We've also got to think about the inflation outlook and growth outlook as they will move the market. So the current stance Over the medium term, underlying inflation is expected to increase. However, we're now looking that recent data suggests the CPI pickup will take longer. So comments on that, worth listening out for. And you've got the, the very dovish and very hawkish reactions also listed there. Growth outlook, current stance: the risks to growth outlook remain tilted to the downside. And we're now looking, recent data suggests slowdown in activity, which you've seen from recent data points. It's looking like it's going to take a bit longer before we see any kind of, uh, recovery as well. Just seen some comments actually come through. China Commerce Ministry: Chinese firms have begun to inquire about prices for U.S. farm goods. This again was, was something, uh, you know, just going off ECB topic, topic. This was, you know, talked about, uh, last night. as well, and just talking about these, these meetings taking place. So nothing new, uh, off those comments really, uh, but yeah, worth, uh, you know, having a look at this, this sheet from, from ING, really, uh, helpful and just putting together some scenarios and being best placed to almost, you know, not necessarily predict but have your outcomes if this was to happen, where the, the price could go. And of course, not just the euro, you've got to be doing it for European equities and and bonds as well, which will put you in good stead going forward as well. Going to be, uh, certainly it's coming into— it's a bit of a, a touchy subject, this, this QE. You've got certainly the recent times the, the German, the Dutch, the Austrian, and even the Estonian central banks very against the QE package. Um, however, you know, and comments certainly from, from Twitter and, and previous meetings, Draghi has earned his reputation for, for getting his own way. So I think that's, you know, it— there's not going to be too much in, in the way of, uh, you know, a surprise, uh, I would say. So yeah, it's going to be a good meeting, I think. Um, certainly over the last couple of years, if you just think back to, uh, each ECB meeting, how many times you think, oh, this is boring, and, you know, Draghi's done such a good job at literally getting price to finish the day exactly where it started. I don't think today is going to be one of those days. I think it will, uh, we'll see a decent move actually in markets. Having a look over the calendar for the day, we just transition that. So going through this morning, we actually do have some, uh, some numbers out of Europe. Industrial production at 10:00, very, very, very unlikely we're going to move. One, because of the ECB. Two, because it's July numbers as well. So almost disregard that as an opportunity, I would say. And then of course lunch, quite a period. That's when I would, you know, recommend having a look at these scenarios in a bit more detail. 12:45, the announcement. 1:30, the press conference. And And also 1:30, you've got those inflation numbers out of the States and lower-tier initial jobless claims, which obviously less focus is going to be on. Got the meeting as well, which is, is tentative. I'll confirm times when I see that. And of course, speakers, just confirming that 1:30 of Draghi. We'll have a quick look over the charts technically now. We've obviously done the, the euro and oil. S&P, I'll just be keeping an eye on, on on, on the DAX to maybe lead the morning session. You've got some interesting points. 3,000, you would expect now to be an area of support. The, the high that we broke through, retested yesterday, 29,21, another key level. And of course, we're not far away from that all-time high, um, and we spent quite a lot of time over those few days around the 25th to, to 30th of July as a resistance point. So 30, 28, around there, really worth keeping a close watch on. Brexit headlines relatively limited, to be pleased to hear, for now. I still like the look of, uh, of 124 for a medium-term short. Haven't really threatened there enough, just the 50 ticks away. We are starting to get squeezed in, you could argue, from, from both directions here, and and finding a floor around 123.17. So that's something I would keep an eye on, you know, a decent move perhaps if we were to break below there. Obviously just be careful about trading this market overall too, technically, uh, with the headline risk that could occur. But you do have a nice trend line over the last 3 trading sessions, uh, that if we were to break and 123.50, a decent move could could occur, and then maybe I get that 124 that I would want to see come in, test, hold, uh, before looking to, to get a move, uh, lower. Safe havens just, uh, pausing a bit. The DAX just recovering, uh, obviously going into the session. I would recommend sitting on, on the hands ahead of the ECB, um, but I'll get that, uh, ING sheet in the chat, and any questions as usual, please do let us know. We'll be on the mic throughout the day, and of course ahead of the announcement at 12:45. But if I don't speak to you, I hope you'll have a great trading day.