Markets Fall Overnight With China In Focus

Okay, very good morning. It's Friday, 22nd of May. I'm Anthony Cheung, the head of market analysis here at Amplified Trading. A quick word before I begin: it is the final day of our current professional trader program. So we've had a group of 9 guys with us for the last 5 weeks, fully remote, online, from really around the world, different places. And it's their last day today, and out of the 9, I'm pleased to say 6 are looking likely to get backed by Amplify to continue trading with us. So yeah, amazing job by the team. Is the number always that high? It moves around. I'd say that is a really good result to see that many people coming through and really being quite effective considering, you know, how how quite difficult markets have been from a judgment point of view. So testament to them and to their mentors and well done for the final day. Also as well on the YouTube channel, don't forget to subscribe. We've got new videos coming over the weekend, of course, so normal routine. You get me during the week and then you get Eddie who does like a deep dive into some macro topics that will come out on Saturday. He's got a video talking about the Fed and QE and how are they gonna run into trouble with that, what is yield curve control, these types of subjects. And then Sam, of course, if I just look down here, he did the first of what's going to be many. Every Sunday he's going to do his weekly trading setups, looking much more on the technical side. And yeah, really well received last week, so long may that continue. So as I said, subscribe, hit that notification bell on the right-hand side, and you'll get all the alerts when things go live. So thanks for listening to that, and let's get stuck into the actual markets and what's happening this morning. And certainly a little bit of risk-off, um, tone to proceedings. And this coming after a real focus, not so much this time on the coronavirus, actually on the continuation of the US and China relationship just deteriorating further. We had the China National People's Congress, the NPC, overnight, and that was something that the markets were eagerly awaiting. And there's been a couple of interesting developments there, an admission of putting out a GDP target, somewhat symbolic. That really hasn't happened for many decades in terms of their usual practice of setting a numerical target. Remember, I was talking yesterday about a specific figure for GDP, and that gives markets confidence then about the types of policies that they're likely to see and to what extent. But the fact that they haven't done that is making people a little bit nervous. And then, as I said, you've got confrontation. There's Beijing passing a new bill basically in regards to— as we've seen here, it's impacting Hong Kong and a few other things I can run through. But looking at the charts firstly, given what I've just mentioned, index futures are lower overnight. I'll show you the chart shortly, but the Hong Kong Hang Seng Index underperformed down around 5%, a little bit more modest in, in places geographically like Japan and Australia, but still negative. And looking at the US futures this morning, we are down about 15, 16 points in the S&P, and we're down about 132 below the S2 already in the futures in the DAX. So a little bit of kind of a more classical movement from a correlations point of view. From a currency perspective, the dollar having a bit of a bounce back So up about 2 tenths, so just imparting a moderate degree of pressure. But if you look at the major pairs, definitely a dollar-inspired move. EURUSD and Cable both down around 27, 28 pips here in the top left corner. Cable not really flustered at all by the GFK consumer confidence reading overnight showing British consumer confidence down the lowest point it's been since the depths of the financial crisis. Over a decade ago. Um, the flight to quality bid just helping support gold prices, looking to reverse course of some of the loss that was seen in yesterday afternoon session London time. And T-notes up about 7 ticks, just closing in, finding some near-term resistance, uh, trading a tick below the R2 in the daily pivots. Also oil underperforming, um, I'll get to that in a moment, but again tied to just generally the reaction to what's happened in the developments overnight, the announcements coming out of China. So let's get straight into the news. Uh, stocks drop as China or Hong Kong shares lead fall in Asia. Um, China moves to impose Hong Kong security law as concerns grow. Well, let's take this step by step. The first thing here is you have the National People's Congress, and this is a real staging post for the Chinese economy in terms of they set out then the course of action that they foresee for the next period ahead. And as I said, one of the unusual things that they've done is they've broken their usual practice of setting a numerical target for economic growth. Now, got a quick snippet here from the latest Goldman's note that came out overnight, and they mentioned two things. On the GDP front, they say by not issuing one for 2020, those arguing for a target believe that by not setting one, that may weaken market confidence in further policy support mechanisms, essentially, you know, by, by defining, say, a level that they typically put relatively optimistic. It kind of shows that they're willing to spend fiscally in order to achieve that target. By not doing so creates uncertainty, and uncertainty in market terms generally in the short term creates negativity in terms of price. The second thing that they said, Goldman's, was that a special national bond quota was set at 1 trillion renminbi, about 1% of GDP. And this was the big disappointment for them. They said the market expectations were more toward 2 trillion or more based on some of the discussions that they were having with some of their clients and contacts and so on. So about half the size. So, you know, like what we're seeing with many other countries, of course, lots of bond issuance they've got to finance these, you know, huge fiscal spending packages that are happening in various different countries at the moment. But China coming out with a smaller size and perhaps not that certain about their economic growth potential over the next period ahead for the rest of this year has created a bit of nervousness in the market this morning. Um, what else has been going on? Well, this is the other thing. Beijing is using a legislative sessions to pass a bill establishing an enforcement mechanism for ensuring national security for Hong Kong, setting up a potential showdown, of course, with Trump. It's been kind of simmering this week. It certainly has escalated over the last 5 days or so, um, and Trump, who's come under pressure, of course, in Washington to reconsider, um, the next course of action. The announcement on national security legislation has prompted then calls, as per this headline, for activists to start new protests against this security law. And if you remember, you know, before the pandemic, this was going on for months in Hong Kong. And so could this be reignited this weekend? Again, for me personally, any friends and family in Hong Kong, please do take care as ever. But unfortunately, this is probably going to lead to some kind of backlash, whether this weekend or in the coming days and weeks. But just goes to show that, you know, it's far from over here, and there are many facets to this trade war that need monitoring. So the Hang Seng was down heavily overnight. It did underperform. This is looking— here is the session that you had from yesterday's close, the reopening, and it's just one-way traffic pretty much to where we trade at the moment. As you can see, it's still down about 5% for the time being. Um, the other thing in response to this then, and what is helping kind of further add fuel to the fire, is two U.S. senators are proposing legislation to punish Chinese entities involved in enforcing proposed new security laws in Hong Kong. And the law there that's being proposed would penalize banks that do business with these entities. Um, bipartisan plan is one of the several at the moment targeting China in Congress. So As well as Trump kind of having a war of words, there are actual bills here of a tangible nature that are being implemented or aiming to be. And you've had that whole, you know, attempt to try and delist a number of Chinese companies on US exchanges. China have come out and said, fine, we'll pull some of these big names like Baidu, for example. So yeah, there's quite a few things to monitor here and On that front, uh, 5 flashpoints to watch. I did retweet this article on Bloomberg if you want to have more of a thorough read from the Amplified Trading Twitter account. But basically they break it down into 5 distinguishable points that you need to monitor when it comes to the kind of news flow pertaining to the, the spots of interest that could move markets. And these would be trade Taiwan and Hong Kong on this whole kind of sovereignty and One China policy issue, and how forcibly or not do they try to go after that. Technology, of course, like we've seen with Huawei, uh, the coronavirus, uh, and financial ties. Um, the US turbocharging its efforts, um, is what one official said, to reduce the reliance on its supply chains on China. And that is something similar what we've heard from the UK Prime Minister Boris Johnson in the Times this morning ordering plans to end reliance on Chinese imports. It is interesting. It's, it's kind of a more tactile but, but strategically the same. Boris looking to align in a way that really kind of places China at the epicenter, particularly with the coronavirus, which is is having such a devastating impact on not just the UK but the global economy. And so it is strategically, from political point of view, good to frame China as the, the kind of reason or the originator of that. And yeah, definitely less confrontational and vocal than, than the way Trump's doing things, but certainly follows a similar thing. And this has got Dominic Cummings written all over it, because this plan to kind of reduce reliance on China for things like vital medical supplies, other strategic imports. They're calling this Project Defend. You know, that couldn't be more politically driven. It's kind of like take back control and these kind of very, um, you know, kind of wordplay to invoke a certain kind of type of public reception to these types of movements. So yeah, certainly this is a strategy that's being deployed. But yeah, as per those 5 reasons, they're the kind of 5 things I'd look out for: trade, Taiwan, Hong Kong, technology, coronavirus, and financial ties. Despite all of this though, um, and everything that's being said, and China warning that it will safeguard its sovereignty, its security, its interests, and it has threatened countermeasures, they've also said we will continue to pledge to implement the US trade deal amid these rising tensions. So yeah, it's kind of a bit of an odd one at the moment. Uh, it's a relationship, uh, out of necessity, if anything. You know, we're talking about two of the world's superpowers, and they're so intertwined, particularly on the, um, the area of trade, that it's very hard to see what Trump had threatened earlier in the week, that he could simply walk away. I think that's just pure nonsense, personally. But that doesn't mean that markets cannot, um, or are not susceptible to potential pullbacks here on escalation. And that certainly is what we've seen encapsulated on today. It's kind of been building up and then the crescendo coming almost here in the, in today's session. So when I'm looking at the charts this morning, one thing I am thinking is, you know, look, we've had We're going into the, um, the weekend. You know, I would say it's probably unlikely that anyone's going to want to hold positions over the weekend, just given the, the associated risk of a further development that would be akin to further escalation on this issue. And so, you know, do you get a lot of people just closing out some of these shorter-term positions, and would that impart a little bit of a further run in this movement that we're seeing? Um, at the open this morning. Potentially, uh, could be something to look at. And in that scenario, perhaps a bit more weight coming into the equity market, fueling just general support then for fixed income futures, gold. I mean, if you're looking at the S&P here, just quickly, we're just having a retest down at what would have been, what, Tuesday late evening going into the Wednesday Asia Pacific session. Found a bit of support and a bounce there at around— lining up with the S2 in the futures. But yeah, if we were— if we get heavy and we start retesting down there when the US starts coming later, and perhaps even toward the end of the US Wall Street session, then it'll be targeting probably around here. And then at around these levels would be interim targets. So if I just make that a bit bigger, put some ellipses, so You got that high here, you got the respective resistance and support points that we've seen. That's actually Monday session. And then you've got that, that low as well from Monday session, which was the high going back to the previous week on the 13th. So there would be some potential downside targets. The market definitely, um, if it were to come under some considerable pressure, could see a pretty decent move today. if the US come in, they really buy into this notion of, uh, of clear escalation on that US-China trade side. Okay, what else is there? Well, you know, one of the other things here is that crude oil on track still, despite the sell-off, for its 4th straight weekly gain. But, you know, there's a couple of things to bear in mind here. You know, it's very rare for a market to go up and up and up, and as you can see, the gains have got smaller over the course of the last 2 weeks from where we were. The other thing, of course, in the crude market is, you know, do not forget that China is the world's biggest importer of crude. And so, you know, this dip that we've had overnight definitely has been triggered by all of the news that I've just been covering. And that being then is that If China are uncertain about their economic future, if they have then not issued an numerical target for GDP for this year, if that weakens market confidence about the type and size of response they're going to do in order to create stability in their economy, well, then oil prices are going to come off. And particularly then in context of the, the sharp and steep acceleration in price that we've had basically over the course of the last several trading sessions. I mean, this is just looking at crude here, uh, looking at the July contract. You know, we broke out of that range-bound trade that we were in, generally speaking, 14th, 15th, and the price really has accelerated considerably. So, you know, pullback of the nature of what we've seen, quite interesting. Again, if stocks do come under some assault later, then I guess potentially then it's really around this the 31 type level, which would encapsulate then that kind of consolidation of price that we had over the course of the beginning of the week. And then if we were to break down below there, could be quite interesting to see where we finish. Final thing, Bank of Japan did come out overnight. They decided in an emergency meeting to launch a new lending facility that aims to channel more funds to small and medium-sized businesses suffering from obviously the, the economic blow from the, from the pandemic. Just looking at the Japanese yen though, if anything, it's moved in a counterintuitive way. This has been more preemptive action from the bank to try and help offset the negative implications of what's going on, help boost the economy. Typically you would think, well, this is akin to easing and shouldn't the yen weaken? But quite the opposite, the yen's actually strengthened in this case. I think it's been overridden and dominated by the general risk-off sentiment across the other asset classes on these bigger macro stories. And if anything, the Bank of Japan didn't change rates, it didn't change anything else, uh, perhaps that being a little bit of a disappointment for those that were looking for more easing type, more definitive action, and that didn't materialize. Um, calendar-wise for today, what have we got? UK retail sales is actually coming out well, has come out since I've really started the briefing. And just to quickly cover that, the pound— let me just show you— as you can see, has really seen very little to no movement at all on the retail sales report. And I would say that's absolutely warranted. That comes despite the fact that UK retail sales month-to-month came in at -18.1%. Expectations were for -6. 16%. These are April readings, so we knew they were going to be bad. So it's always been very well, much priced in at this point. Other than that then, we'll, we'll move to the ECB minutes. We'll get those just after midday. The US session is particularly quiet actually. There's no major US economic data today, so all the more emphasis people might put on the China-US kind of growing confrontation You would say it's probably hard to go a session in the context of now and this news flow without Donald Trump saying something going into the weekend. Tends to be his general routine and practice. He likes to give that kind of show of force just to finish off the week for markets. You know, he definitely knows what he's doing in regards to the timing side of things. So yeah, I definitely keep an eye out for that. I'll share his full agenda. I'll tweet it from, from my account later. All right, that is it. Let you guys get on. So again, well done and good luck for the final day for the guys on the pro course. Look forward to continuing your journey with us for next week. For anyone else interested in getting more information on that, just go on the website amplifiedtraining.com. Have a great weekend and I'll see you next week. Thanks very much.