Markets Digest First FED Rate Cut Since 2008

Okay, very good morning. It is now 1st of August, so obviously the aftermath of the FOMC announcement from last night. So definitely going to wrap that up, what exactly happened, quick overview of how markets react, and importantly, what do we think about now going forward. I've also got the Bank of England today, of of course, we're looking out for the quarterly inflation report. We'll look at that as well in more detail. Particularly awkward time, I guess, for the Bank of England to put out forward-looking economic projections with such political uncertainty at the moment. But getting straight into the charts, let's have a look how things reside at the moment. As per usual, I'll run through really those two topics are the main focal point, and then I'll hand you over to Sam who can look at the the charts more technically. So everything's at the moment reacting to the aftermath of what has been this idea of a more hawkish cut. And in that sense, as we'll look at, the Fed delivered with their rate cut. We knew that was going to be the case. They did not opt for 50 basis points. I, as I've been saying for a number of weeks, I can't really see the reason why anyone would think they would have done 50. Given how explicit the communication had been rolling back that idea about a 50 basis point cut. So that was the first knee-jerk reaction that we saw in markets. But then ultimately, as more details came out, even though we saw an initial knee-jerk reaction one way, it did bounce after the Fed ended their balance sheet runoff. They brought that forward, i.e., keeping more QE in the system than what they were going to end, which was September. But then when the press conference got underway, uh, there was one distinctive comment that Powell made, and really this is where the moves really started to build up in its momentum. He said, quote, we are thinking of it as essentially in the nature of a mid-cycle adjustment to policy. And that was really the trigger point. Now looking at a couple of the major charts this morning. Equity index futures still quite sharply lower, albeit off the worst levels we were looking at last night. The S&P's— I've still got all my markups from the technical levels of significance where the market was reacting yesterday as we broke through very quickly that trend line that we had on before. The Dow really did respond nicely on the, on a long-term a technical level of support. Great call by Sam at the moment of when we were about 100 points away from that level, and he was looking at this previous high in April, May, the support point of what we had in early July, and we, we hit that pretty much to the tick before we saw a 200-point pullback. Uh, so yeah, excellent call there and, uh, and managing to get some of that move. Otherwise, in the currency markets Obviously prevailing dollar strength. The DXY up still another 0.4% this morning. And just check out EURUSD. I mean, that's at a really, really interesting long-term level. If I just adjust my chart a little bit so you can see, but EURUSD has broken through very important technical area of support in around the late May period. And you can see when we were talking about this last night we were saying that if it breaks that level, well, there's definitely going to be opportunity for more downside technically. And the target now really in the futures is still a run lower by a good 30, 40 pips from where we are at the moment. Don't really see any reason why we wouldn't get down to closer test to 1.1036 in the euro futures, which starts to bring in then that previous high that we had at the beginning of May the next logical target here. So obviously Trump not happy about this from the point of view from how a weaker euro— he's been obviously criticizing the likes of Germany and so on about how Mario Di is artificially weakening the euro to the benefit of their exporters and so on. But number one in the firing line obviously is not so much Mario Di, he's in the line, It's of course Jerome Powell, um, who's going to be in the firing line. So with that, let's have a look at a couple of the headlines here. Now, for one, this idea about the Fed thinking of what happened last night, this idea of an insurance cut— think of it essentially in the nature of a mid-cycle policy adjustment. What does he mean by that? Well, Bloomberg put out an interesting graphic this morning, and this is looking back basically to Powell's remarks raising comparisons to an era of the mid-'90s— '95, '96, and '98 specifically. So rather than the, the cutting cycle that we had after the episode of the dot-com bubble or the global financial crisis, um, in the last 10 years what they're looking at here in the mid-'90s was when there was just a small adjustment and what otherwise was keeping rates relatively constant at that time. That's how the market seems to have perceived here what Powell has communicated. Um, so as we've seen here, the Asian financial crisis, the Russian ruble crisis, uh, and so on. One of the hedge funds, LTCM, was near collapse at that point. Required a cut only then though for rates to remain constant, if anything go back up at that point at around this kind of 6% region. Very different from a cutting cycle like what we saw from rates well north of 5% going all the way down to where you were at zero, uh, more recently in the, in the subprime crisis. So yeah, that's what's kind of spooked the markets to some degree, but Personally, I do think, I think Powell's played it pretty well. I think that because I think that there's enough to warrant the Fed moving to a more accommodative stance, and that warrants then a rate cut given certain economic elements that are materializing in the economy. They want to show that there's a reasoning behind their loosening policy, with the options that if things deteriorate further, they they'll cut again. And I think that's absolutely appropriate. One thing that— one person who obviously does not agree with me is Donald Trump. Donald Trump, we know his stance and what he views of Jerome Powell. Basically, he said last night via Twitter, pretty much straight after the event, Powell's let us down again. China and Europe are going to pull away. He ended quantitative tightening. Which he shouldn't have started in the first place anyway. We're not getting any help from the Fed. Usual kind of tone from the president. Now, my actual thoughts on this are I really don't think Trump really has much of a personal problem with Powell. I think all of this is, uh, absolutely PR management of the situation. My interpretation of Donald Trump is that he's done an absolutely awesome job— might have to throw me the Trump hat in a second here— but I think Trump has done an excellent job at basically safeguarding his political campaigning period of the next 18 months. Because by, from day one, criticizing then the Fed, it means that basically if Powell reacts to deteriorating economic conditions and cuts, well then Trump gets what he wants and and that hopefully can mitigate any severe downturn. If Powell doesn't do what he wants and the economy collapses, given how important a measurement that is for the vindication of the policies that he's been deploying over the last few years, he can just go, it's not my fault, I told you, it's Powell's fault. And so he wins again. So I think this is just an insurance policy strategy from Trump. I expect absolutely no different, and I expect it to absolutely continue going forward because he needs that ability to pass accountability to Powell if things don't go right. So yeah, I don't think that's a surprise. I think Powell did the right thing, um, and I can't really, you know, when I, when I see the press laying into Powell's communication tactics, yeah, I can get— I mean, there was one comment here, let me show you. What he said, which is I guess he could have done better. And at the end of basically the Q&A session, Powell said, let me be clear, it's not the beginning of a long series of rate cuts. But then he added, I didn't say that's just one. I don't think that's possibly— in hindsight, he could have improved that slightly. But these guys are under such scrutiny, and Powell is up, got his back against the wall against the president, against the market. I think he did a good job, and I think his strategy is correct for the time being, is my personal view. I think if they— if the Fed need to cut again, they will cut again, um, but he gives him all the options available. What is the— what is the market now expecting? If we look at the federal funds futures, well, what are we pricing in now? Well, rates currently now, obviously, the, the, the the Fed funds band is 2 to 2.25 given the cut last night. And by the end of the year, the market's baseline pricing is for rates to decrease only one more time. And I think that's probably appropriate for the moment. The one thing I would say is that— and I had a question from one of the traders here— was that, what data, Anthony, do I need to look out for? What's going to be the really important data to define then the decision-making? And actually, I think that all kind of top-level tier 1 data now takes on a kind of renewed element of importance because the market now is trying— or if we're to understand correctly of what Powell was trying to stress yesterday, I think the, uh, the monitoring of data is going to be, on, on a balance, is going to be very important. So it's not just inflation now, it's everything. It's growth, it's retail sales, it's industrial production, all of these elements, uh, for the overall decision-making of the health of the economy. And does it warrant then further action the future. And of course, we've got non-farm payrolls tomorrow, which could be, again, be an interesting, interesting release to have a look at. Moving on from the Fed though, let's look at something else. Let's look at the Bank of England. This, I'm afraid to say, is not going to be probably anywhere near as exciting as last night. Last night was particularly interesting, particularly second half of the event, markets really started to sell off quite aggressively in the equity space, uh, and, and so on in other assets. But with the Bank of England, here's a couple of things that I'd be looking at, um, obviously given that we're in August, um, so February, May, August, and November are the quarterly inflation report, um, releases. So this one typically a little bit more interesting because we get those forward-looking forecasts. So we growth and inflation and so on, as well as the rate decision. Now, a few different graphs I can show you. So the last time they released the QIR was in May. Now, if you go back to May, that's that orange line, um, the market was looking at the fact that interest rates, if anything— you remember back in May, the Bank of England was being viewed as a bank, but when everyone else was talking dovishly. They were the one remaining more neutral, possibly slightly hawkish central bank. Given the fact that UK unemployment is tracking roughly at its lowest level since about 1974, um, UK wage growth is the best it's been ever since pre-financial crisis. So going back to what, 2008 type of era, that's meant that Well, actually, there's been quite a nice development of people's wages going up in respect to fairly constant and lower inflation, which is a net benefit for the consumer in that sense. So reason to be hawkish on those elements, of course. But the thing that's been happening here is that there's been a significant deterioration in, in other areas of the economy in the UK. Namely, we saw with the PMI data, what, a week and a half ago, you saw construction had its biggest fall since 2009. You've got manufacturing at its weakest in about 6 years, and you've got stagnation in terms of the important service sector. Um, importantly, this graphic here is UK GDP. Now, UK GDP was pretty robust actually in Q1. But remember, the reasoning— a lot of people have reasoning behind the strength of that— was built on inventory building in order to get ahead of the impending potential disruption that could have come from the initial end deadline of Brexit and risk of a no deal on the end of March. That of course did not materialize, but that's left us in a state of now there's very very little demand. And so actually growth expectations for the next quarter in the UK is basically zero. So that has obviously shaken things up a little bit. You've got Boris Johnson obviously now at the helm. The idea of a higher probability of a no deal, a non-transitional, more disruptive Brexit process means that we've seen a number of the MPC members sounding increasingly more dovish, and the most important one, Michael Saunders, who's the most hawkish, turned dovish about a week ago, saying that basically our forecasts are out of date and that doesn't mean that we have to deliver on what they were saying. So we're looking out for quite, um, you know, quite a dovish turn here overall from the Bank of England. Hard really to see how, how dovish that is. One thing I'd like to be clear on, the forecasts that they will release will not have the Boris premium given the cutoff date. So when these forecasts were created, it means then that basically it wouldn't have encapsulated the understanding that the confirmation of Boris being in. So given that, if it doesn't have the Boris premium, given the cutoff date, it will underestimate inflation path. They cannot formally make no deal a central case because it's not the government's policy as well at this point. Remember, unless there's a new general election and Boris has a brand new mandate, then he can lead forward the deal. At the moment, it's still that there should be a deal. It's just that Boris obviously is playing this card at the moment. So it's going to be quite an interesting one to see how this, this plays out. The forward interest rates for August, so looking at what the market is pricing, is that rates in the UK will be cut towards the beginning of 2020, taking us down 25 basis points to 0.5% of where we are today. And that being the kind of one and done for the the moment. I saw this article and I think this makes things a lot more explicit and easier to understand. These are basically 5 different ways to interpret then the Bank of England. So number 1, removing the hawkish bias and assuming a smooth Brexit. Yeah, hard to see at this point, can the Bank of England assume a smooth Brexit? I mean, as I said, although Boris is threatening these, the government's plan is still to deliver it in a transitional phase. And Boris, as much as there's bluster behind what he's saying, at the heart of it still is the fact that he does want a deal at the end of the day. It's more of a negotiating posture that he's been putting forward, albeit the big tail risk of no deal. Now, if they were moving the hawkish bias assuming a smooth Brexit, I would say that's probably more towards the neutral area in terms of a potential market response. Potentially a little bit of, uh, mild sterling appreciation could be on the cards. Number 2, option 2, uh, remove the hawkish bias assuming a hard Brexit. Um, now if that's the case, I'd probably be looking for downside in sterling. I'll leave the pound chart for Sam really to look at, but we're at a really interesting technical point for the pound given some of those initial post-EU referendum lows are within striking distance of where we are at the moment. Option 3, then, maintain the hawkish bias, expressing concerns. I would see the pound appreciating a decent amount on the back of that. I don't think that they will maintain that hawkish bias. My reasoning being, if the most hawkish member has shifted, then I believe that the whole composition of the MPC board has also moved more to the left, to the dovish side. So that would be a surprise, I think. I don't think keeping that hawkish bias and just expressing concerns is enough. I think there's enough to warrant now a shift to being more neutral on that, that overall bias. If they maintain the hawkish bias but 2 members vote for a cut, that's a little bit more tricky, I think, to, to manage. You might get then that kind of volatility, the initial spike and reverse move. And then number 5, maintaining the hawkish bias but expressing business as usual, I'd say that's the lowest probability, most sterling positive on the initial release, i.e. They just kind of stick to what they were saying in May. But I think enough has changed that they do need to alter and with the subsequent projections to reflect more, a more kind of overall more pessimistic outlook. So I see that as very low likelihood. So therefore maximum impact, I'd say you'd see a sharp rally in the pound if that were to happen. Let's not forget though, even if any movement of the pound higher, that does not detract from the bigger story at play. Which is a very downward trajectory for the pound of late, and I would anticipate that to continue, particularly because of the dollar strength. If you look at the fundamentals at the moment, in the short term you've got a hawkish cut from the Fed leading to dollar appreciation. And at the moment, despite any movement we see on the back of the Bank of England today, overall the fundamentals and the political uncertainties are stacking up, which will weigh on the pound. That fundamental divergence of those two currencies with these key technical levels makes it an interesting prospect for the pound for potential more and more downsides to come. This is the final thing on the UK I wanted to point out. There's not really a lot of people that have talked about this, but I just wanted to remind you that keep an eye out for the Brecon and Radnorshire by-election happening in Wales. I think it was— trying to recall the numbers— something like 2008 to 2015, I think it was a Lib Dem area, and then it flipped in 2015 to being Conservatives. But the Conservative— the reason for this by-election is that Conservative MP was filing false expense claims, hence the by-election. And the bookies have the Lib Dems as favorites. They've been very much pinning it on, um, even though this was a Vote Leave area, the Lib Dems have seen a pretty decent resurgence even in that area. And the, the Vote Leave is divided problematically for Conservatives between the Brexit Party and the Tories, um, and therefore, given the, the local focus as well of the Lib Dems, the Lib Dems are the favorite. Now, if they do win the Liberal Democrats, that reduces Boris Johnson's majority in Parliament to just one, which is obviously particularly interesting given the, uh, how difficult then at this point it would be for Boris to do anything other than it just cements the idea that there is a general election in the, uh, in, in the pipeline for the next couple of weeks. Voting ends, usual procedure for UK, so 10 PM. The results then we should be looking out for on Friday morning, so I can update you tomorrow. I don't think this makes— this is not so much, I think, a sterling trade. It just really encapsulates the idea of why it's more than likely Boris Johnson will call a general election in the coming weeks. Okay, that is it. Let me just have a quick look at the calendar of what's to come, and then I'll hand you over to, to Sam to give you a look at the technicals. So from a data point of view, we have had some Chinese data overnight, so let me just update you with numbers. The Caixin Chinese manufacturing PMI, 49.9, slightly above the expected 49.6. So not really too impactful on the markets. Market's very much still focused on the Fed from last night. This morning you get the manufacturing PMIs in the various eurozone areas, but I think these are the, the final readings, so I won't be looking for much reaction on the back of them. Bank of England, of course, two-part event, midday and press conference with Carney and some of his senior MPC to deliver the QIR and the Q&A, uh, that'll be at 12:30. So do look out for that. In the afternoon, weekly jobless claims, ISM Manufacturing PMI, and obviously we'll look at not only the headline figure but the employment component. Let's not forget we've got Nonfarm Payrolls as well coming out on Friday. All right, I'll leave it at that. Let's get Sam on, see what he has to say. Catch you in the chat room, and I wish you a good day ahead. Thanks very much.

Thanks, Anthony Cheung. Hope everyone's doing well and enjoyed last night. Just gonna start off with the pound. We're on that low from overnight, but certainly on the longer-term chart here, and just putting this on to the weekly, you can still see that trend line is on. We never really got a retest of that. Unfortunately, you can see that would have been— obviously hindsight would have told you whether it'd been good or not, but waiting for, for that to have come back in around the 124 handle would have been lovely. Not to be. However, we are trading on some pretty key levels, just going back to the March and, well, the beginning of March, end of February time back in 2017, literally trading right on there now. A bit of support come in, uh, if this was to go. And of course you do have the, the Bank of England later, so it's not a foregone conclusion that it does go today, of course. Then we are really looking down to those 120 levels on the futures, uh, that we did get that, that post-Brexit low, um, in January 2017. So that would be the next sort of level I'd be looking at if we can get a breakthrough there. But you can just see the importance of the levels that we're trading at, and understandably just slowing down a bit over the last couple of, uh, couple of days. Opportunity-wise, you can see once we did break the area of support, that offered really good opportunity around sort of 7:30 on the press conference. Across the board, the dollar was strengthening, of course, but you can just see the importance of 121.35 and the futures— two tests there. So we're keeping a closer eye to see see how we, uh, react if we were to come back down again. To the upside, a bit of a line in the sand, 121.61, which was yesterday's low. This morning around 3 AM, that retest happened. If we were to get above there, you imagine it's just going to drift for a bit before pushing higher. But really key level, 121.35, and then that 120, uh, coming in a fair amount of ticks below. But that be massively important if we were to get a break of that. Euro, as I mentioned, did decent break yesterday. And if we put this on the weekly chart and again remove the pivots just to clear things up, you can see, well, now suddenly the break of that important level, which was May this year, was also May 2017. We're now looking like we can get down to touch what was the, the high back at the beginning of the week of the 1st of May. And on the futures, that coming in at 1.1039, give or take a few ticks either, either way, 36. So that would be the next important level for the euro in, in, in where the, the market really is picking up for, for dollar strength here. And, you know, can we get a retest of any of these levels in euro that for an ideal place to get short. You could either look at 111, yesterday's low, up towards the pivot, or just above also looks quite good because you do have the previous low from the 25th. The pullback yesterday again was a great opportunity, certainly on the hourly chart. These are all areas where you would favor to continue this trend, and despite, yeah, Powell's best efforts, the, the dollar is strengthened on a rate cut. And it has continued. I mean, look at the journey it's been on. Now this is just going back here to the 27th, uh, of, uh, of July, just literally drifting down and down and down. Uh, quick look over equities, uh, you can see the, the original push lower, uh, following the announcement at, uh, 7:00, 7:30, uh, with the press conference. We, we got to pretty key points and mentioned that, that Dow Jones level, but But also the S&P really coming to a key point where we gapped higher a few weekends back. Well, I guess quite a few now. We almost filled— well, we did fill the gap on that, but we almost came back down to touch that low that we had from July. So decent push through here, understandably a bit of support. Where to go from here? Well, if we just drop it down to a 15-minute, you know, it's always worth with these kind of markets trying to identify where that line in the sand could be. Right now, to today's price action, it looks quite choppy. You haven't got that, uh, look that there's going to be at least a trend line forming from the lows. I mean, maybe that's something to have on just in case there was to be that third test from the upside. You can see we're not exactly forming a nice trend line down either. So the pivot, or basically the higher of the day, somewhere you would have marked up. But for me, I think where you've got, uh, what, what was an interesting area of support, 2989, you'd want that to go. And then of course people would be looking towards the low that we had on the 30th, and then the pre-breakdown low just above 3000 as a level. But just above the pivot, I'd just be a bit careful about getting too aggressively long. 2989 yesterday was a decent enough area of support. Short. And if, uh, if that was to break to the upside, then I'd be a bit more confident. Just be— for, for all equities, I just have these trend lines on just to see, can we start respecting them and then maybe look for that break lower as well? It'd be a case where I really let the market tell me what's going on. Break of those lows, again, just be careful because below yesterday's low is that low that we had back on the 1st, but then it does open the door up you know, quick move down 10 points lower to the original high on the 28th of June, as which could obviously offer a bit of support there as well. Gold, tricky one yesterday. You had that complete reversal, didn't really make sense to me perhaps at the time, but you know, all was well that ends okay. I guess if you were looking to short gold, and you can see we did push down lower, we, we got up to test that R1, uh, again. And that had been such a key level, you know. You can see previous sessions how we've sort of broken through this, this trend line, uh, you know. I just roughly drew that on, but you can see the— just the significance really going back to the 26th. Every time it come back to test that trend, it just couldn't confirm a break above. That coupled with the high that we had back on the 25th, uh, just saw us pushed lower from yesterday. And then the, the press conference and the interest rate decision, we never really threatened to get back above that. The pivot, um, did, you know, it was quite choppy on the retest as well. So how you would really have traded this, I think the, the opportunity, like the euro and the pound that we saw, really came around 8 o'clock once we had had all the noise. We've digested what's actually happened. We broke this low came back, and like the euro, came back to retest, and you got a good opportunity to, to then get in, uh, as well. Finally, a bit of, uh, support here, double, uh, bottom on the S1, bit of a trend line from the 11 o'clock high last night, well respected, 1, 2, 3, 4 tests, price just getting squeezed in. So break above that, just be a bit careful about maybe looking for a short on this resistance at 1422.7. To the downside, if that was to go, levels of, of interest— you see there's not much room until we get down to the low of the 17th. So again, just being a slight bit careful there, uh, as well before wanting to take that on. And that's a really key level, low of the 17th, high of the 9th. Uh, if that was to break, then suddenly, you know, a bigger move could be expected, I'd say, down to at least 14.10 and 14. 0.1505. So gold just perhaps getting squeezed in from both ways. Uh, the volume's not really going to be there for now, of course. Having a look over oil just to wrap things up. Uh, the low— I can see there's a line still drawn up, this S1, previous highs. Uh, I think Saif must have had this drawn on from, uh, when he was talking through the DOE, and that held superbly. Really nice level support overnight. Yesterday's original low, that's going to be a key level, 5807, along with the pivot, would be my sort of line in the sand for the upside if I was wanting to, to get long. Price not necessarily squeezing in from the downside, but again, similar thing, just looking to, to have these trend lines on just to see how price does react should we come back to test these areas again. Quick look over, and there's just that, that Dow. You can see what a, what a reaction What a reaction to that. And, uh, I guess if you're longer term, you know, you'll be happy to see all-time highs again if we can get back above, uh, 27,033, those lows that we did break through yesterday. Quick look over at the DAX just to see how we're going. First 15 minutes— 30 minutes, I should say. Uh, positive, pushing higher. So stocks in, uh, in Europe just buying into the open. Let's have a quick look over trend line from those highs, just getting a test of that. So you can see you had that there and you were having a look. Now can we get a close above here? If that was to happen, you might get the follow-through, certainly in US stocks. But where we close this trend line will be key going forward. As usual, any questions, do let us know. Bank of England coming up this morning, or midday I should say, and then a bit of data in the afternoon as well. So any questions, as usual, please do let us know. If not, I hope you'll have a great trading day.