Markets respond to dovish Powell

Okay, very good morning, Thursday, 29th of November. Hope everyone had a good evening. Just looking at markets then this morning, main topic in focus of course is the speech from Jay Powell and the dovish change of rhetoric being confirmed and instigating then a meaningful move across asset classes, given that really, you know, the Federal Reserve's monetary policy tightening cycle is really right at the core of what's created a lot of the market fragility over the last couple of, of weeks. So I'm going to take a look at that. We'll have a look as well at the headlines coming out of Mark Carney from yesterday about his view on the fallout from Brexit in under certain scenarios. And then we'll have a look as well at the G20 coming up at the end of the week because we can tie in a little bit over as to what we might expect and the moves that we've heard from Powell more recently and how they might be interlinked. So first things first, just having a quick look across the different asset classes here. Obviously the main take-home from Powell, and this was as we identified at the beginning of the week, one of the real critical releases of the week, but also as well probably the most important speech that Powell has given since coming into the Fed chair position. Just given the fact that we've had quite a reversal in commentary of late as we've had this correction in the equity market and movements throughout the month of October being so negative. So on October 3rd, just so you're aware then, before we initiated that, that full correction in the US equity market, this is when Jerome Powell was talking about the fact that we were far from neutral. In terms of US interest rates, indicating then that given the fact that, you know, Trump continues to impart further fiscal measures, the way the economy is performing, that yes, we're on track for interest rate hikes, but we're not near the top yet. And that being a concern for markets. What's happened though over the course of the last couple of days and now confirmed by Jay Powell last night was that we're now just below the level that would be neutral. This is a big backward step from where he was just a matter of weeks ago, and certainly you can see the, the response that we've had in the market. So from a dollar point of view, immediate dollar weakness was observed when he spoke. Uh, consequently, just looking elsewhere, uh, gold spiked higher, reversed a lot of the losses that were seen a few days ago. Bond yields tumbled. However, the move a little bit more contained, you, you could say, in the Treasury market. And then equity markets surged across the board. I think it was one of the best performance gains that we've had in the equity market in several months on the back of that. One trade that I did see that was one of the most clearest, I guess, in terms of an execution and setup, and I know that a number of the guys here on the on the trading floor were able to trade was the euro move, because with the immediate weakness of the dollar on the comments, we saw an initial blip higher. But then there was quite a, a key level here, uh, which was on the intraday, right on the R1 level. We kind of had some good setups of the previous support points and resistance, and it was at that point when the market kind of broke through, came back down for the entry. To then take it back long on the move higher, scaling out of some of the position. So some excellent trades from last night, and good to see people not just kind of jumping in trying to compete with the algos, but picking good sound technical points using that fundamental understanding that this is quite a, you know, dramatic change and shift and confirmation of that dovish now stance. And that they were going to get a continuation of dollar weakness and hence EURUSD movement to the upside. So, so very nicely done by a number of people. I was just looking elsewhere. So S&P obviously has retraced now all of the sell-off that was seen going back to the 19th. So a lot of the, the kind of downward move that we were seeing from the FANG weakness and the negative performance on Black Friday just being taken back. And elsewhere, one other thing I was looking at was AUDUSD on a slightly longer time frame, because with the, you know, kind of two things here is when I'm looking at the Aussie on the fundamentals perspective, one is obviously the dollar, and now you've got a weaker dollar backdrop. But then thinking of the Aussie, what's critical obviously will be the upcoming G20, whether or not we will get any type of deal amongst China and the US, how likely that might be, or whether Trump— does he back off this kind of threat of ever escalating tariffs? That would obviously be an Aussie positive. So if that was to happen in the backdrop of a weakening dollar, well then this kind of previous long-term level going back to 2017, the kind of summer of this year, a resistance point as well on the trendline that we've had in play throughout 2018, could provide a bit of a floor then for the next kind of push on the upside. But again, you would need a kind of peaceful G20 to occur on the trade war front in order to fit that narrative to play out that, that kind of fundamental bias. A few other things then to consider here. And one is just wanting to have a look at cable. Cable also feeling the benefit of the weakness of the dollar from yesterday, just finding a bit of support at the moment around the, the kind of early Asia-Pac low that we printed, that also being a level that was in play going back to the beginning of the week. So one thing that you've probably read a lot of this morning is a lot of headlines. UK media just obviously can't get enough of Brexit at the moment and And they're loving Mark Carney's kind of apocalypse scenario of what could happen in a no-deal situation. So here's a bit of a summary of what the people like Bloomberg are banding around, and obviously Bloomberg are massive Remainers, so it certainly fits their political agenda quite nicely. But this is the scenario on breakdown. GDP, they estimate, would drop 8%. House prices in the UK would drop 30%. Sterling falls 25%. Just give you an idea then, that's below parity, uh, for sterling. Unemployment shoots up to 7.5%. Bank of England interest rates need to rise to 5.5% then because inflation would surge almost 3 times that of Bank of England target One thing I want to be clear of here, and more so for anyone who's new to market because those more experienced will absolutely know this, and this is that all of these numbers are absolutely redundant because this is not going to happen. This is purely a byproduct of the media latching on to one of several economic scenarios that get stress tested as part of the Bank of England's analysis. This is not what the Bank of England expect. This is just the worst-case possible, lowest-probability scenario. But of course, if you read the UK media, they just can't get enough when you start talking about the end-of-days type scenario. If I think about it politically, I think the Brexiteers have done a pretty, pretty wise move here because it was the lawmakers that have called for this latest analysis to be conducted. If you're a Brexiteer, you know that the economic consequences— so you know the media is going to jump on the headlines, and now you can start putting out there the whole angle about, look how the Remainers are trying to scare us again, and so on and so forth. So utterly frustrating to see how the media misreports these types of information, because quite frankly, I can tell you now, this isn't gonna happen. Because if we get anywhere near this type of scenario, you'll see these politicians quickly fall in line and a deal will get done. So just to understand, we saw obviously yesterday the Bank of England stress tests, and during a stress test they need to run UK banks through the most adverse scenarios to make sure that they're adequately equipped for such a severe downturn, one of which would be far in excess of that of the financial crisis of 2008-2009. So this is something we've heard, these numbers, actually several weeks ago. These are not new. And although I can see the pound has just come below that, that level, this is nothing to do with this scaremongering type of headline, you know. And that's coming from me, and I'm a massive Remainer. So Here, I guess the thing to be aware of when we're looking at the currency markets this morning is, you know, if you're looking at the euro currency, also a little bit of a pullback. You know, let's not forget that we've rallied in euro over 100 pips here, and likewise in cable, we were moved higher, you know, X-ing out this Carney speech. There is still obviously a massive amount of uncertainty amongst Theresa May's ability to pass through the meaningful vote on the deal that she has secured. And so from a fundamental point of view, there is still a negative bias for sterling. So if anything, the move is a little bit more cleaner in the euro, given things like Italy are fairly quiet for the moment. And so you've got kind of a static euro, negative dollar, whereas with cable you've got kind of negative fundamentals now on both sides. So if anything, I think the picture is a little bit more cleaner or clearer in that, in the euro currency. Um, okay, quick couple of things I wanted to look at, one of which is obviously given Powell's backtracking of now becoming slightly more dovish. To put this in a bit of perspective, this does not change what's going to happen in mid-December. The Fed are hiking rates. As far as the market is concerned, that is still very much priced in. Question mark is, at the moment, Fed communication as per the dot plots in the Summary of Economic Projections is that they're gonna hike 3 times in 2019. The question is now is, given this dovish turn, has that 3 now become 2 or has it become 1? And hence we've had this repricing in markets. So we'll get the update on the dot plots in that December meeting. But obviously one person that's going to be very pleased with what Powell said yesterday is Mr. T. President Trump has got what he wanted. Stock markets were obviously plummeting in October, you know, if we just look at the October or the October-November move here. So This is going all the way back to October to put it into a bit of perspective, all the way down to the low in which we've had. So we've retraced now, we're sitting at the retracement of about 38%. We've had a barrier around 62% on the pullbacks as well. And with an equity market which Trump uses as a kind of political tool to speak to the masses about the validity of his policies, the strength of the stock market is critical. And the fact that the FANGs and the overall broader market has been so heavy, hence he's been so critical of Fed policy. And so he's managed to cultivate this turnaround. However, one thing is, is that how long can Trump remain happy And I read a very interesting interpretation here on Zero Hedge. Obviously, Zero Hedge needs to take with a bit of a pinch of salt, but their alternate view does bring about some quite interesting things. Um, let me just quickly check oil for a second. There's a few people mentioning oil to me at the moment. Yeah, oil's just gone through $50, so you know, you can see how important that $50 handle is and it was such a psychological and technically sound point. For me now, this is all coming home to roost because I think 50 breach, it's going to get interesting very quickly for crude oil. And as I was saying at the beginning of the week, I'm kind of looking— I'm quite bearish actually about what might unfold here. So a break of 50 I was calling at the beginning of the week and I was saying that quite rapidly we could get down to a 45 handle, but 42 would be the big support level on the downside. Um, it's— we've actually broken 50 here sooner than I thought. I thought that actually I was kind of thinking around a Monday timing, in that when we come out of the G20, um, that basically Trump gets his way and Saudi have no other choice. They can't cut because of a lot of the political fallout that's happening between the two nations at the moment. But this has come a little earlier than expected. So again, Trump will be happy with this, but the Saudis will be sweating at the prospect that, you know, they're getting ever more offside of where they need crude to be, uh, in order to, to implement a lot of the policies that they've got in, in play over the medium to long term. So keep an eye on 50. Going forward throughout the day. Now that that has broken, when the US come in, obviously it's going to be really important now to see how they react. Could be now that that previous really strong support— let me change charts here— that previous strong support now becomes resistance on any pullback up to the $50 handle to go short again. Of course, the one thing to be aware of is going to be, um, do now Russia Energy Minister, the Saudi Oil Ministry start coming out and commenting, trying to again verbally try to jump in, get ahead of this, and try to counteract this downturn. But this is a significant break of crude here. And interestingly, despite the weak dollar, despite Jay Powell, which should if anything alleviate some tension over global growth concerns if he was to back off hiking rates, that doesn't matter. There's too much at play here on the supply side coming in with oil still with fragile global growth concerns. I do think oil, now we've broken that, is going to remain quite heavy going forward. Okay, just quickly back to what I was going to say about Trump. So back to Powell. Trump, I think, will be happy of what Powell's done. However, an interesting interpretation I've seen here is about how Jay Powell might have had a stroke of genius. By that saying that basically now he's done what he's done and cultivated a turnaround in markets, has he forced Trump into a corner where he has to cut a deal with China come the G20? And that in a sense helps Powell out and makes managing the economy, economy easier if there is a trade impasse and the situation doesn't worsen. And so what I mean by this is that Trump definitely wants to prop the stock market up. Powell's done his part. Now, if he was to go ahead, the president, put more tariffs on China, well, then he himself jeopardizes the thing that he wants most, which is a stronger stock market. So has Powell put him into a bit of a corner now where he has to kind of be fairly passive coming up to the meeting when there was a credible risk of him being quite aggressive and making the situation worse. So just quite an interesting take in, in that respect. On that point, I did send out some research this morning from Danske Bank. I do definitely think this is worth a read when things do quieten down and there's a bit of downtime. And this looks at the 5 reasons why they specifically still see a 60% chance of a ceasefire. Some really good, short, sharp analysis here Trump initiated the talks this time, and so the fact that Trump initiated the rounds of talks by first calling the Chinese president suggests Trump has changed his view and believes now is the time to talk. Remember, Trump's kind of style, normally he gets kind of dragged to the table, you know, hills dug in, but now he's been the one proposing that to come forward and talk. Is his hand starting to weaken? That because of the US stock market has weakened so spectacularly in such a short period of time, and he knows that he is critical to the management of that process. 3, further escalation could backfire for, so, for the same reasons that I've just mentioned. If now China, not that they would increase, they would just respond in kind to any further tariffs, and that would further hurt US companies which have already started to balk at the state of play. China unlikely to increase concessions even if Trump adds more tariffs. The belief here being that China would quite happily swallow short-term costs of facing higher tariffs for the belief then of the long-term picture. And then China will demand a ceasefire to enter a new round of negotiations. So China has kind of said many times they won't be bullied even to the extent that they will not negotiate with a gun to its head, that they've said before. Um, so instead, China could be expected to retaliate one way or another. So point being, there's a lot here that has changed recently that's lessened potentially some of the stance for Donald Trump, uh, which does make things a little bit more difficult for him to be not cutting a deal at this point. So Obviously the G20 absolutely critical for the outcome of financial markets going into the next week or so. Not forgetting as well, with oil having now broken that 50, Putin, MBS, Trump, they're all there and they are expected to have discussions on the sidelines about the supply in the global market as well. So quite a bit going on to be aware of. Uh, just having a look elsewhere. Someone just mentioned as well Cable, just saw a little blip lower. So let's just have a quick look on a minute profile. Yeah, that's a pretty quick tumble back through the pivot, uh, through some subsequent technical levels. So pretty much a full reverse of the entire move that we saw, or in fact it almost is now a full power reverse on that move. Uh, so, so this is it. I think one thing to be aware of is the dollar, obviously. So I just switched my charts again. The dollar has weakened substantially last night, but a lot of the bank commentary that I was reading this morning was more talking about the fact that— and SocGen was a bank saying this— that actually, is Powell just realigning the Fed's stance and the Fed are going to continue their process of hiking. And actually what's happening here is that Powell overextended the communication too far with initial comments about being far from neutral, and this is basically him just realigning expectations, not so much him being outright dovish. So a little bit of a pullback here for EUR/USD, uh, and the currencies in general on the back of a bit of a dollar bounce, I don't think would be massively surprising. I guess if we come back down to these types of levels in the futures, that previous low point that we had on the 20th in the euro could be something of interest. Just finding a bit of support at the moment around that previous high back on the 27th and kind of around that area we had in the 20th, 21st of November. So a couple of things to watch here. So I'm going to kind of wrap things up pretty prompt because I know things are moving. Okay, quick look at the calendar and a few things to, to have a look at. We've got the German, uh, state of— state CPI coming out this morning. I'm just checking, let's see if any of these have actually come out. So Saxony's already come out. To give you a flavor, that was at minus 0.1% on the month-to-month. The previous was 0.2%. So again, the German state CPI is a little bit weaker on a month-to-month comparison. So that obviously as well might feed the hand of a bit of a pullback in, in the euro to some extent. But I guess given the movement in energy prices, it's not massively surprising for, for inflationary conditions to just pull back a touch. Going further forward, we've got the German data coming out shortly in the next couple of minutes. That's the unemployment rate and change. Tends to be quite volatile, but maybe not always that market moving. The bigger things are in focus at this present point. Into this afternoon, there's a cluster of European data at 10 o'clock, but again, this is second tier. It looks exciting, but it's, it's very rarely is it so. These sentiment figures are kind of, as I said, second-rated data. The pan-national kind of CPI from Germany is going to be the summary of its parts, so mainly just looking out for the rest of the German states to report This afternoon you've got the core PCE numbers coming out the States, weekly jobless. The FOMC minutes this evening now are pretty much rendered redundant, uh, just given the fact that we've heard from Powell more recently. Those minutes now are very dated. So to conclude, I would say main things are further digestion of Powell. Has the move now been priced in So a bit of a dollar pullback here materializing as I've been speaking, and consequently the major FX pairs just pulling back a little bit. Oil as well significantly breaking 50 is going to be potentially something to watch. Now that that level is gone, we are back down to the lowest levels in pretty much a year or just over 13 months, and it does mean that oil could be quite susceptible to some further heavy downside. Given the technical breach. Okay, German data coming up. I'm gonna leave it at that, let you guys get on. So have a good day.