Markets Stabilise Despite Iran Rhetoric

Very good morning, hope you are well. Tuesday the 7th of January, uh, gonna get you up to speed of latest updates in regards to, of course, Iran and what they've been saying in response to potential retaliation against the US strike on their military commander we saw at the end of last week. So how are markets digesting that? Uh, an update— not that it's something I'd be contemplating that would be forming a trading strategy this morning in the euro or European assets, but something to be aware of for German economics. Some data out for car manufacturers, which we know, or has been historically, one of the key sectors within what drives their stock index. So we'll have a look at that as well. Um, but first off, let's just look at the charts and how kind of sentiment— excuse me, let me just transition that back to the other screen here. So these are my charts, uh, and as you can see, things are relatively quiet for the moment, um, not too much going on this morning. And interestingly, um, after what was a bit of a continuation of the reopening of trade on Sunday night of the risk-off developments— remember this time yesterday we were talking about the Iraqi parliamentary decision about expelling US troops. We're talking about Iran looking to ramp up its uranium enrichment. All these sorts of things just added a little bit of further fuel to the initial, more stark reaction that we had on Friday to the initial assassination. But markets have now stabilized. And, you know, as I was kind of inferring in the briefing yesterday, I, you know, my base case view here is still that it's a de-escalation, not an escalation from here forward. And then in a few days' time, and certainly by the middle of next week, I think people will be quite shifting their focus back to the, the looming conclusion or not of the signing of the Phase 1 US-China trade deal. And Iran will be ongoing but secondary to that factor. And markets seem to be just getting over that initial knee-jerk response already. Things have stabilized. I mean, the Dow closed up, I think, was it 68 points yesterday? So US indices managing to reverse course to a certain degree. And this morning, uh, things have kind of really followed suit. I mean, gold, yeah, a little bit of a move higher overnight in the Asia-Pacific session by a few bucks, but generally flat on the day. Pretty similar situation for WTI crude oil, albeit still still down about 40 cents, but off its lows that were seen at the beginning of the Asia session. And global stock futures seen higher at the moment. DAX up about 100, uh, looking right now as I'm, as I'm talking, the center-left charts have a bit of a test on, on the R1, which was the initial opening high earlier this morning when Europe came into the market. So yeah, been largely brushed aside, but does that mean that the rhetoric has has slowed from Iran? Well, absolutely not. So this is the kind of situation that you probably would be familiar with, with the likes of, say, North Korea, for example, in recent years, where, you know, they make some pretty inflammatory comments that would— if you weren't of the way— well, if you were completely naive and you took everything at face value, you'd be Wow, they're gonna fire a nuclear missile at us. Well, I mean, we know that's not the case. So Iran continues to say things, but the market, you know, seemingly is, is just brushing this aside for the moment. Um, does that mean that I'd completely switch off this as a potential catalyst to move markets today, tomorrow? Absolutely not. I mean, should they do something, as we've discussed before, and particularly if they were to target certain strategic areas of the passageway of crude oil coming out the Persian Gulf or the infrastructure in Saudi Arabia, well then sure, the whole thing can heat up very quickly. But the idea here being the likelihood of that is a lowercase probability. But Iran, in the Fars news agency, if you've not heard of that before, that's kind of the semi-official state state-backed news organization in Iran, and so of course they tend to be in line with what the rhetoric has been from the top level, like the president and the supreme leader and the foreign minister and so on. They were quoting the commander, or the new commander, of the Iranian Revolutionary Guard, who is saying Iran's response will be strong and humiliating to those who assassinated Soleimani. They will avenge the enemy. There will be no safe place for Americans in the region. Now that last point, no safe place for Americans in the region, I did see a quite interesting graphic when I came in on the train this morning, and this was looking at where US troops are stationed in the Middle East. I thought it's, it's always good to have a bit of context here, and we know that the US military's presence within this geographic region of the Middle East is particularly pronounced given the importance of the trafficking of, of commodities and specifically crude oil. So here you can see that the likes of Qatar and Kuwait have substantial U.S. presence, and neighboring Bahrain is vital to American interests because that's where a lot of their naval support is stationed, the U.S. Fifth Fleet. A substantial military presence in one of the air bases as well, situated around that same area. All of this, of course, in incredibly close proximity to the strategic, you know, kind of importance of the choke point of the Strait of Hormuz, the, the passage of 30% of all seaborne-going oil. And this, of course, includes the very northern tip of Oman and the southern area of Iran, of course, which has been subject to disruption over the last several months from the Iranian Revolutionary Guard. So yeah, the, the US by no means, um, you know, if they needed to— and I guess this is one of the things where yes, they could increase troops within the area if necessary, but the idea being is that there is a pretty substantial presence there already. And so again, these are the considerations that Iran needs contemplate if they were to take any type of aggressive or confrontational measures in that respect. So yeah, I mean, the other, the other things— what's Trump said? Well, Trump has made it clear that he's prepared to respond in kind to any retaliation from Iran. I think he even talked about targeting specifically holy sites of significance within Iran. One's got to think that although that's a grave threat, that that is exactly what it is. I think that's— there's no way I think that Trump would really go through with that. I mean, if you want to, if you want to really fire up extremist terrorism, then that's one sure way to do it, you know, because there's two different things here. I was talking to Piers about this before and we have a shared opinion here that we think that this Iran situation will de-escalate. The one thing you cannot account for, of course, is an isolated extremist individual such as what we saw, for instance, on London Bridge only a few weeks ago. There's nothing to say that something like that could happen, but, you know, one would think given the context of the 2020 scenario right now is that I just think it would be incredibly difficult to conduct something to the tune of 7/7 or 9/11 again, given how intense surveillance is now globally. So these things, yes, they're risks, but I think they're kind of qualified risks in the sense that they're particularly low. I just hope that this provides a little bit of kind of further insight as to what's happening on the ground within this region. The other important thing— this definitely does tie in geopolitics, of course— that I thought I would mention was this: why China will not join any Iran-Russia coalition against Trump. So obviously the global community has, has largely been kind of split. It depends which side of the divide that you sit on, whether you're a supporter of Iran such as Russia, or you're a supporter of the US who say that, well, at the end of the day, this guy was killed because he was planning an attack on an American embassy. So it was a preemptive strike, if you like, in order to safeguard their own interests. Now, what have China said? Well, the Foreign Minister Wang Yi has said was highly concerned by the action and called it unacceptable, but he did not use the words like condemn or denounce like his Iranian and Russian counterparts. Now, on Monday, yesterday, the US accused China of siding with Russia at the UN to block a Security Council resolution condemning the attack on the American embassy in Baghdad that precipitated Trump's decision to strike and kill the Iranian commander Soleimani. So particularly interesting here because, because China is caught in somewhat of a dilemma. If you think about China from a strategic point of view, China has a particularly close relationship. I was reading this morning that Vladimir Putin and President Xi have met more than 30 times over the last roughly 5 years. And China has called their relationship with Russia of the highest and most important kind of relationship that it has. Now, if you think about it, that kind of Silk Road, long-term ambitious project that China has to deliver its, its objective of becoming the world global trading partner and the top of the kind of pile of the global powers, it's very important that they have a strategic alliance. And a very strong relationship with Russia and the likes of Kazakhstan for the infrastructure of the passage of goods from east to west. And so this is crucial. But the problem that China has, they can't come out and condemn the US's actions and support Russia because that would jeopardize a signing of a trade deal that they're currently in dialogue and negotiation for. And it's not just about Phase 1, there needs to be a Phase 1, 2, and 3 most likely. And so they can't cause conflict with the US at the same time. Equally so, China also has interests in Iran. China is one of the biggest purchasers of Iranian crude, but they also are one of the biggest purchasers of Saudi Arabian crude, both of which sit with different allegiances within that region. So China is quite interesting. My end kind of assessment of this, and I guess the takeaway home point, is that China will sit on the sidelines, not say anything. This is an issue for the US and the West and its historical kind of intervention within the Middle East for them to sort out. China's tactic will be I don't want to get involved, but while everyone else is disbenefiting, I will make heed or hay of the, the relationships that I can form on the back of this. Is what China has been notoriously good at over the course of recent years and decades. So yeah, just quite, quite interesting to see. There's many, you know, this isn't just Iran and the US, there's many different back stories that need to be managed and maintained at this point. And it's just interesting how it all kind of interlinks within this trade war and this whole kind of jostling of power that's happening at the top at the moment. But yeah, I wouldn't be expecting much in the way of firm commitment in rhetoric from China or any type of action. They're just gonna leave the US to it and let it unfold and continue business as usual, undercover if possible, in that respect. Okay, other than that, the only other thing I wanted to mention, because it is pretty light with any fresh new fundamental news, is this one. I think we've got German factory orders coming out, uh, I think it's tomorrow, definitely this week. But one thing that we will be looking at closely is going into January, February, Q1 really of this year is how is the German economy faring given the contraction of a substantial degree we've been seeing in their manufacturing sector. Now what we've been seeing is the car-making industry has taken an almighty hit over the course of 2019. At the beginning of last year, it was in fact the largest sector by representation within the German DAX, and now it's one of the smallest. We've had multiple profit warnings out of all of the major German carmakers. Now, combination really of pollution concerns— remember back in 2015, the diesel emissions scandal at VW— we've got trade conflicts going on, US potentially targeting tariffs. You've then got the risk of a disorderly Brexit disrupting then, uh, the eurozone, and you've got slowing economies as well have all been weighing on demand. Uh, and so we've seen data overnight which has shown that German car production is now at a 23-year low on waning exports. So again, this isn't something that I'd be looking to see or have as a major component of a strategy to trade a European asset today. This is much more top level. I would look at it more from an economics point of view as a consideration for coming months for what monetary policy could be adopted should the German economy continue to, to weaken. You know, it's in a fairly precarious state, albeit somewhat stabilized condition at the moment. And so where it goes for the next couple of months is going to be very important for ECB policy going into the first half of this year. Okay, looking at the calendar, what is there to come for today? The major things are we got the flash eurozone CPI coming out at 10 o'clock, so that's So that is something that you will need to consider if you are looking at things like the euro currency, for example. Expectations are the flash year-on-year reading will be at 1.3% with a range of 0.9 to 1.4. So actually a slight increase from the previous reading. We've then got in the US international trade— German, excuse me, US factory orders comes out later on this afternoon at 3:30 PM. 3 o'clock with ISM Non-Manufacturing. Remember, keep an eye out on the employment constituent. Of course, we do have Non-Farm Payrolls, and traders will be looking at that component as to see whether or not there's an increase or decrease against a previous 55.5 on that particular statistic. Uh, and then later on this evening, uh, Fed Discount Rate Minutes. That's seldom a market mover, so I wouldn't worry too much about that. But then for oil traders, we get the API inventories, of course, every Tuesday evening. And that will lead us up then for the Wednesday DOE release. No actual major scheduled speakers by the looks of things. A couple of auctions if you are looking at fixed income markets. 2029 gilt auction out of the UK this morning and a $28 billion of a 3-year note auction kicking off the issuance from the States for this week. All right. That is it from me. Let me hand you over to Mr. Sam North. And before I go, one final word is we will be covering Non-Farm Payrolls live on this YouTube channel, so don't forget to subscribe, hit the notification bell, and you'll be alerted as soon as we do go live. So I'll see you then. Hand you over to Sam.

Hi guys, hope, uh, we're doing well. I'm just going to bring in the, the euro to start things off. And I was just having a look at seeing just on the longer time frame here of the euros, putting this on the, the daily chart. And as you can see, yet again, we're getting into one of those periods like we had all of last year where the euro just drifts higher and you get a really important trend line and it holds. And once that breaks, well, we know what happens. So just be keeping an eye on that, starting on the, the low of the 29th of November here on the futures, uh, 24th, uh, December, and then, uh, on the 3rd of Jan, you can see getting that other test of that point. And if that was to go, well, could well see a further push down. However, of course, if it was to come back up to the high that we had of this year, which is also the high that we had from of August, things could then start to get a bit more interesting to the upside. I've actually seen a bit of talk yesterday on Twitter about people favoring that upside, um, but we'll have to obviously wait and see how that goes. For a medium-term trade, waiting for the, the closing break either below trendline or above, uh, that sort of 113 handle on the futures would be a good way to go about it. Just dropping it down to 60 minutes, just have a look at it on a more intraday day point of view, to kind of obviously move that trend line as it comes to the low that we had on, on the year. So that would be somewhere around there by the looks of it. Um, but just, uh, yeah, keeping an eye on the last couple of highs that we've had today, overnight, and then, uh, yesterday as well. You can see that's getting squeezed in, so potential break of that is an opportunity just below where we're trading, uh, or yeah, kind of the low of the day. I'll be expecting a bit of support around here to build up. Was the previous high yesterday morning, got the S1 as well, another point to keep an eye on. The pound yesterday, decent push in the morning, failure to really get below the low that we had on Friday. Uh, decent push, and it's coming up to test its high of the day, which is the high of yesterday as well, and the 132 handle. So for the pound, I'll be keeping a watch watch on this. A couple of, uh, comments I was reading this morning about how plans for no deal has been taken completely off the table. Whether that can get filtered into the markets or not, we'll have to, to see. But a break above there, you know, you'd be looking and targeting maybe 20 ticks higher or so. Good area, uh, looking back here from the 2nd, uh, of the year, 132.20, uh, and 32.29 would be another point to keep a watch on. Below where we're trading, you can argue it's a sort of 40-point range really, the pivot yesterday afternoon's lows and up to those highs as well. And it's almost, I guess, a case like the euro and waiting for the opportunity either way to, to come through to see what could happen there. Stocks, gap lower yesterday, so obviously do what they've done for the last few years and just recover by the dip. And it seems like all-time highs are pretty inevitable now, uh, looking at this market. Uh, the S&P here, you can see, uh, late in the day, uh, around sort of— what time do we really confirm that break? Around 5:30, 6 o'clock, confirm the break above, uh, the, uh, the gap, and we continue to push on. And, uh, we're now $32.50, which of course could act as a, a bit of a resistance point. We've had some decent selling around here. Obviously you can argue it's a bit choppy, but certainly on the 27th, the 2nd, and now today as well, we're holding up there as well. So a bit of a line in the sand perhaps today for the buyers and sellers above there. You feel it's, it's pretty straightforward to get that new all-time high. And it's a very similar picture here. You can you can see for the Dow Jones and the NASDAQ. The NASDAQ closest to making its new all-time high, which of course was made on overnight Thursday, Friday. So keep a watch on that. Gold, it filled the, the gap pretty much. You can see from, uh, the weekend what an opportunity that was to buy along with S1, the high that we had back on the 3rd as well. And we pushed pretty much, uh, since then. However, the high of the day, the, the previous low of yesterday morning before we then broke through, so it's an important point. 52, 1572.5, keep a watch on that. And you'd argue that's really more of a zone now along with the pivot, and then also some previous support from yesterday as well. So, uh, yeah, a couple of dollar, a couple of, yeah, a few dollar sort of area of resistance However, gold is to continue to come down. You've got to favor stocks getting above 3250, and then we continue to go higher. We'll be keeping another watch if we were to drift lower on that S1. If there is this big de-escalation, well, gold's got to come lower. Oil, of course, early on filled that gap, and, uh, we pretty much, uh, have— have you see there— have done most the move and And while the low here is important, $62.22, I feel if we do come back down to test that area along with $62, it could well open the door up to complete reversal back down to $61 as well. I think we would need something quite big for us to see a continuation of overall of all of these moves as well. Quick look over the DEX. What it's doing on the open, just pushing higher, but a big resistance point you can see here, uh, from the third. So keeping a watch on that. We've had a couple tests this morning, not just an important level because those points, but also some decent price action in previous days as well. So keeping a watch on that. A break above there, you'd favor obviously American stocks to follow suit, which of course remain, uh, over the last 12 hours or so pretty bullish. But 3250, the obstacle, uh, for a real close there, you would say. Any questions, as usual, please, uh, do let us know. Um, I hope you'll have a good trading day and I catch up with you later on.