Markets Await Signing Of US-China Trade Deal

Very good morning to you, Monday 13th of January. Hope everyone had a fantastic weekend. The plan for the briefing this morning is, given there's usually quite a lot to get through because I want to give my view for the entire week ahead, not just the session in front of us, so gonna stick to a kind of macro fundamental review for this session. What I'll do is I will issue the weekly strategy report out later this morning with all the technical kind of levels, both intraday and longer term. So starting off, before I go on to the calendar, with the general mood in sentiment this morning, and relatively quiet. A few things do stick out though. The pound underperforming a little bit We're going to have a look at some dovish commentary coming out on the front page in the weekend in the Financial Times from an MPC member that is getting a bit of attention. We've just managed to break below some of the lower bound of price activity we had from the end of last week. Meanwhile, elsewhere, both gold and T-notes in slight negative territory. Yellow metal down about $6.50, T-notes down about 1.5, 2 ticks. Comes as index equity futures just seeing some positive movement, albeit fairly moderate at the open. Not too much to speak of really over the weekend's press. Some of the headlines which we're going to cover, of course, are the highly anticipated signing of Phase 1 of the US-China trade deal. As I said, there's a bit of an update from the UK, from an NPC comment that was made at the weekend. And then also earnings season has kind of crept up, and that commences on Tuesday with some of the big banks getting things underway. So we'll have a look at that as well. Over the weekend, as far as Iran was concerned, they did come forward— absolutely no surprise, I don't think— claiming that actually they thought it was a missile, and so that's why they shot down that Boeing jet But is that really moving the market? Well, no. What I'm looking at here is WTI crude futures. So markets have already kind of digested the latest state of play, really. And if we actually go back to where we were on that Friday, actually, I remember because we came back in the office on the Thursday the 2nd and Friday the 3rd, and that was when that initial situation did unfold. That was that strike on the US-Iraqi air bases. And then we had the gap up higher after the Iraqi parliament was saying that they wanted to expel US troops. And then there was fears of retaliation. And then we had that secondary little pop back on the 7th. But ever since then, I mean, if we actually look at when this whole Iraq— well, excuse me, Iran Anarak situation really kicked off. That was where it started. We were trading around 61 flat and now we're down at 59. So we're actually lower now than where we were prior to this all kicking off. And does that mean you should really, you know, switch off about tensions in the Middle East? Well, no, but I think it just goes to show, and as we were kind of suggesting through the briefings, the idea that when it comes down to it, there's a lot of face-saving that needs to be conducted. But overall real intention behind engagement was probably unlikely. And that's after that flare-up of kind of a week of focus. I do think, and as I've been saying, I think now we kind of revert back to the traditional focus from the macro point of view, which is that of the US-China trade talks, which are going to get underway really starting today because that's when the Chinese delegation is going to be arriving in Washington later on this afternoon. Otherwise, elsewhere, I can see this euro chart still marked up from when the guys were covering non-farm payrolls live on Friday. Just so you're aware, if you're watching this and you're not subscribed to the channel, just remember to do so because every morning I'll be issuing this kind of macro fundamental update, but also we'll be covering various live events as well, like the FOMC in a few weeks' time, at the end of the month. So do feel free to join us for that. But just looking at this euro, and as per the levels that the chaps had marked up, I mean, I'm just gonna move this up a little bit so you can see it over my camera feed, but some decent levels still really are relevant here. You can see we had that brief momentary test on what was that low point on the 3rd. You can see here on these prior occasions that level does carry a lot of significance, that being in the futures in the euro at 1.1173. And we kind of got up to around that point in the overnight Asia-Pacific session, but have failed to, to breach it as yet. Definitely was in close proximity of it at the moment, so still warrants some watching. But interested to see how that plays out there. This is looking at really the last, I guess, 1.5 months of price action or so But let's get stuck into the news and let's go over the headlines. Uh, what have we got on the calendar for this week? Well, as I've just mentioned, the Chinese delegation arriving Washington, day 2, uh, is tomorrow, and then the tentative signing, uh, is due to take place on Wednesday, which is the 15th. Uh, what is the current vibe, if you like, in the general press this morning. Well, Trump trade deal raises issue of trusting China to deliver. So already the way that the press are looking at this and the various talking heads is that, look, phase 1 likely will be concluded in terms of the signing this week. The Chinese Vice Premier Liu He will lead a delegation to sign off according to the Ministry of Commerce at the weekend in China. Uh, however, it's not so much about the signing of the deal, it's about the implementation of the deal. And this is where, um, China and the US have often been critical of them, is their ability to actually adhere to the, uh, agreement, the terms of agreement. And so what I think could well happen here, if we look at it outside of an intraday perspective— I guess from an intraday perspective, the risk is the first half of this week. A low, I think, probability but quite, quite high impactful event could be if the whole thing just comes crumbling down last minute. That's not, I would say, out of the realms of possibility, albeit not the base case scenario that we and markets have at this point. But something to remain vigilant for, as I said, over the, the fact that they arrive as of today. But otherwise, although I our year-end call as a firm is that the S&P, much in line with the likes of Wall Street, will finish the year higher than where it ended 2019. The idea here is that it's going to see some bumps in the road, and I think inevitably what might happen here is that, you know, we see a degree of potential success in midweek. However, it's going to be interesting to see whether or not over the coming months. Not so much, I would say, the progression of Phase 2, rather the compliance of Phase 1, particularly from the Chinese side, that could then create the exercising of the option that apparently is still in writing that the US have had, that they can still reinitiate tariffs and put on new ones, for example. So it's kind of this We— this is not a new concept. This has always been the art of the deal, if you like, which has been they want to keep the weapon on the table to keep the Chinese honest. The question mark will be that any sign of a lack of compliance from, from the Chinese side could well see a material pullback on the threat then of the US ramping things back up again. And we almost start reversing the positive positioning that the markets have reflected market up at all-time highs of where we are at the moment. So yeah, that, that goes a little bit beyond this week. Uh, as I said, there are some risks to this week alone, but yeah, definitely interesting going forward. Um, this was an interesting graphic that I thought I'd show because if you remember back in the summer of last year, the market was in hyper kind of sensitivity to the positioning of the Chinese yuan. You'll remember We were breaching at the time the psychological symbolic level of 7 per US dollar, and that at the time was— had always been a level of which China had defended in fear of potential kind of mass capital outflow from the country, the kind of snowball effect that could have happened. But they managed to see a— what I would classify as a disorderly weakening of their currency. However, look where we are at the moment. We've pretty much eradicated that entire kind of sequence of activity. This coming, of course, as the Chinese economy has shown some signs of recovery. Some of the PMI data has just been coming ever so slightly off its lower levels. So a bit of stabilization there. Global demand appearing to somewhat stabilize because we also have got over this hurdle almost although don't want to count it too soon about that inversion of the yield curve that we also had over this period of late summer. That appears to have just dissipated as well in terms of an ongoing view of the market. And trade tensions, of course, have eased with the passage of potentially this Phase 1 being concluded. So here we are back at 6.9, the strongest level for the onshore yuan in 5 months, so taking us back to July of 20— 2019. As far as Trump is concerned, this is the agenda for today. So actually, there's not any top-level engagement with China from Trump. He's got a spot of lunch with the Vice President, intelligence briefing, which is kind of usual course for his day, and then he's actually attending— doing a bit of PR later a national football championship game before he comes back to the White House. So if anything, any leaks or rumors that do materialize on the trade, if there is any last-minute hurdle, is likely to come from journalists rather than from the man himself. Trump, you probably saw, tweeting in Farsi at the weekend. That was a bit of a surprise when I did see it on my Twitter feed. He was condemning the government's kind of action with the people's right to protest. There's been quite a large degree of protesting in Iran in regards to the government's handling of what's happened with that jet that got shot down and the response that they've made with the West and so on and so forth. So, so just Trump marketing machine remains in, in full speed at the moment. Moving elsewhere, go jumping back to the calendar. One of the main things I wanted to talk about was UK, um, for two reasons. Firstly, if you look at the economic calendar today, you've got UK GDP, industrial manufacturing production. If we then fast forward to Wednesday, you've got UK inflation data— CPI, PPI, and RPI. Um, actually, I need to check. I mean, I did have here one of— some calendars had the Autumn Budget, but that has of course been bumped, uh, until we get some clarification with the situation pertaining to the January 31st deadline of conclusion of Article 50. But then going to, uh, elsewhere in the week, Friday, then you've got UK retail sales. So if you look at the week as a whole, growth data, industrial manufacturing data, inflation data, and retail sales data— particularly busy week for the UK economy. Now, overlaying that with this, this is a chap, you might not recognize him. Gertin Pfleger is a member of the Monetary Policy Committee of the Bank of England. He is, if you're in America, he's a voting member, so to speak. There's 9 of them in total. But this was a front page kind of splash in the Financial Times at the weekend, and it was titled, "The Bank of England MPC member is ready to cut interest rates. Now, what he actually said here was that he said he would vote for a cut in interest rates later this month if key data do not show a bounce in the economy following the December general election. Personally, I think it's been a close call, therefore it doesn't make much data to swing it one way or the other, and the next few MPC meetings are absolutely live. Now this is quite interesting because if we just quickly jump to the hawk-dove, uh, kind of composition at the Bank of England, you can see here Haskell and Saunders, they're the two that have been dissenters. Remember, the last couple of meetings have been a 7-2 vote split for the Bank of England. They are the two outlying doves. Uh, Flaygo on this table sits pretty much mid-range. However, the interesting thing here, of course, is that over the course of the last week and a half, we've had Governor Mark Carney, obviously outgoing in a few weeks, but we've also had, uh, Tim Reyro, who both have struck a similar sounding, uh, kind of lines or interpretation of the situation about the impact of still uncertainties on, on Brexit. If you remember looking at, you know, measurements like the suite of the PMI data in the UK, things are materially worsening. And so, if you like, the needle from a hawk's, dove's perspective is growing ever so slightly more dovish, yeah, in a sense that potential rate action might need to occur. And so this is what's weighing on the pound a little bit this morning, uh, as you can see in the— let me just get that top chart. I could just manage to break through the lowest point that was seen. What this would have been Friday's price activity, or Thursday's actual low was here. And so just managing to get below there at the moment, uh, and trading at 130.20 mark for the time being. Let me just put this back onto a weekly. A little bit messy on this chart, so actually let me just come back to here, put on a 90-minute. So having broken below those levels of the Thursday low Uh, the next kind of areas potentially could be quite interesting. You got the 130 handle, uh, that also is that low print you can see there on the 27th, and then the prevailing low for the price activity when we bottomed out at the end of last year that came down at 129.40, uh, would be the bigger prevailing move. Whether we'd get there this week or not, yet to be seen, but as per this comment from the MPC member Flager at the weekend, and it coming in combination with what Carney and Tenreyro have said, we already know the stance of Haskell and Saunders. I mean, if you take all 5 of those people, I mean, 5-4, that's enough to tip the balance with a 9-person MPC that the Bank of England have got to cut rates. So the point being is the economic data coming out of the UK this week given that, uh, commentary does become with renewed importance. So other than everything being so Brexit-dominated, of course, of the last few months, specifically this week, I feel that economic data might get a little bit more attention with the potential for a little bit of ignition for downside price momentum should those data points come out on the weak side of things. Other than that, from a, from a Brexit perspective, there's not really too much to look out for. Just so you're aware, Boris Johnson is in Northern Ireland today. This comes after Northern Ireland's main parties on Saturday formed a power government, or power-sharing government. They reopened Stormont for the first time in about 3 years. So he's back there obviously trying to patch up what's going to be partly some of the most contentious issues of this future trade relationship, of course, with Europe in that area of Northern Ireland. But as I said, I'd say the economics is really going to be quite important for this week if you're trading the pound. Now elsewhere, from a US data perspective, a couple things I think you should be aware of. Looking at it from a very top level You've got Empire State Manufacturing, uh, coming on Wednesday. Then you also have the US CPI and retail sales report as well coming out. Retail sales on Thursday is going to be particularly important. The CPI in the US is on Tuesday session. And then the final kind of thing I wanted to mention was earnings. You can see here I've got JP Morgan, Citi, Wells Fargo. So the traditional commencement of earnings season starting off with those kind of top-tier banks. Now you're going to get Goldman's, Bank of America, also Alcoa reporting on Wednesday, MS on Thursday, Schlumberger is reporting on Friday. This is what people are talking about, and it's the idea that corporate profits likely drop for a second straight quarter at the end of 2019, dragging down annual earnings growth to the smallest in 3 years. But this is it. Investors seem fine with that. The idea being then, with the, the kind of stabilization of global growth and putting us back to where we are at the moment, eliminating perhaps some of those runaway negative thoughts people were having about the global economy only a few months ago, the market seems able to really digest this. And with the main chorus on Wall Street being that the stock market is going to return positive gains for the year, uh, I would see that in combination with still relative accommodative monetary policy coming by way of all of the major powers. And then I don't think people are going to fret too much about any weakness that's being seen here by the numbers. This is the general landscape for the earnings. As I said, the major banks will be pre-market as they always are. JP Morgan and Wells Fargo kick things off on Tuesday morning if you're stateside. And that's pretty much it. I don't think there's any real need for me to touch or talk much beyond that. And so I'm going to wish you a good week. Feel free to leave any comments on the video. I'll do my best to respond. On throughout the day. As I said, any technical levels though, obviously you guys more than well equipped, I'll leave you to that. But I will add a few kind of long, longer play levels that I'm looking at for the week as a whole in the strategy report, which I'll send out later. Okay guys, that's it. Have a good session and a good week ahead. Thanks very much.