Morning Briefing - 13th August 2018

Okay, very good morning, Monday 13th of August. Hope everyone is well and had a great weekend. Getting straight into the thick of things, talking about Turkey. That remains the dominant theme for this morning's market open, and then I'm going to hand you over to Sam North back in the office, and he'll be talking about some of the, the technical view for the day. But kicking things off here, you can see Got a little bit of prevailing dollar strength. The DXY up about just shy of 0.2%. So both these major pairs on the top left, you've got EURUSD and Cable on the back foot, both down roughly about 25 pips or so each on the session. The euro definitely worth keeping an eye on, back to the 114 handle here as we speak, within close proximity to the overnight Asia-Pacific lows. And we've got some underperformance once again in the European stock indices. And so the DAX and the Euro Stoxx in particular under some pressure. So a little bit of a repeat, I guess, of what we had from Friday's session, because over the weekend, essentially from Erdoğan, he really didn't change tact, if you like, from what was the, the key speeches from him at the end of last week. And still, I as we're going to go through in a bit more detail, sticking to his guns. And there was some action overnight in the form of intervention in terms of the currency. But let me just show you a few charts first and, and we'll do a bit of background on the situation. But net-net, a little bit of risk-off tone more broadly speaking, that not playing out in the traditional way in response to gold. But this does come amid the firmer dollar, of course. Oil, not only gold, oil also lower, which has been a bit of a recurring theme, I guess, with some of the trade war ongoing concerns about the material effects on the slowdown of global economic prospects for growth and consequently demand for, for oil. That and also the strengthening dollar that we've seen through the latter part of last week. So other than that, equities weaker. So fixed income futures, certainly the Bund on the front foot, up about 13 ticks. The 10-year pretty flat, but in close proximity to overnight Asia-Pacific highs. So a couple of charts to show you, though, and a few things. Here is a bit of a broader perspective of how quickly this Turkish situation has come about. So the bottom axis— I know it's pretty small here, but this takes you all the way back to basically the midpoint of 2013, where we have been in a steady, gradual weakness of the Turkish currency, but obviously in a very controlled fashion in that sense. And then to where we are at the moment this dramatic movement that we've seen of late, and then the inverse relationship we've had with the kind of premium in the Turkish 10-year yield spiking higher. I mean, pretty incredible amounts. The other thing that we've seen from overnight— this is a snapshot from a static period from overnight, this isn't a live updating graphic— but the point being about the potential risk of contagion Again, we were kind of talking about this on Friday, how it can feed across into other emerging market areas. And when it starts to spill out over and beyond that of just the currency issue, is what we saw with the kind of net foreign loan exposure to a lot of the European banking sector, in particular the likes of Spain. Particularly, this is when it becomes a much bigger, larger, broader market concern. And so overnight in the Asia-Pac session, once again we've seen the South African rand particularly susceptible to these types of movements in negative sentiment, the equity indices. So all of this, a snapshot across the various different asset classes for the EM market. Let's have a talk though and through a few key points here of Turkey, and firstly what's happened, and then a couple of interesting things to be aware of to try and understand where we might go from— go to from here. One thing is Turkey has to attract, to give you in terms of financial figures, more than $200 billion a year in foreign financing in order to keep its economy afloat, and hence the reason why they have such dependency on these banking loans from a lot of these European names, as I mentioned, particularly like Spain, but also Italy and France, which are probably the most leveraged of the European banking sector. But the Turkish president, an article in the FT this morning, has, has talked about could potentially try to turn to other places, i.e., alliances, in order to raise funds to tackle this ongoing situation. And these countries could turn to either Russia, Qatar, or China for support, further loosening the already weakening ties between a strategically vital NATO member and the West. So a couple things here to be aware of. And this is what Erdoğan said on Sunday, which is where he gave a kind of major address. He said, our response to the person who wages a trade war against the the whole world, including our country. So he's talking about Donald Trump and the Americans. He said then, is to head towards, i.e., Turkey, new markets and new corporations and new alliances. To give you an idea then, the tensions between Turkey and the West have escalated ever since Erdoğan kind of swept to power with his ruling party back in 2002. He's faced continued accusations of increasing also authoritarianism. We've also had that then by default, and certainly with the recent US sanctions, and of course the ongoing US sanctions we've had on Russia, have brought those two countries ever closer, which led to Ankara's decision to buy essentially what's called an S-400 air defense system from Moscow, which is completely angered those then on Capitol Hill. What we've also had today is the Russian Foreign Minister— quite interestingly, obviously timing is key— but Sergey Lavrov will visit the Turkish capital for 2 days of meetings starting today. So just as the, the relationship breaks down further between the Americans and Turkey, Turkey all of a sudden instigates a foreign minister visit from their Russian counterparts. Turkey has also courted the support of China. So hours after Trump first unleashed large sanctions on Turkey last month, the finance minister of Turkey announced a new, basically, loan package for certain sectors of their economy for the tune of just over $3.5 billion. Another option is Qatar. Turkey has become increasingly important ally of the wealthy Gulf nation where it has a military base and has been strengthening economic ties because their relationship with Saudi Arabia and 3 other Arab states imposed an embargo. So obviously Saudi being an ally of the US, um, one thing here though to be aware of is in terms of a potential bailout package to quell the situation in Turkey. There's been some talk about a potential IMF program, but that's been shot down by Erdoğan. The value though that we're talking about from that as an initial package would be something akin to around $20 to $40 billion. As I said, for the time being though, that has been talked down. Russia though has said they've got their own problems with dealing with the US sanctions at the moment. So would Russia jump in and, and give a much-needed, um, kind of capital injection to Turkey to deal with this situation? To give you an idea, overnight what we did see was the central bank moved to boost lenders' access to the lira and foreign exchange liquidity. So in monetary value terms, Central Bank overnight added about 10 billion liras, about $1.5 billion, $6 billion, and $3 billion equivalent of gold liquidity to the financial system as a means of counteracting this ever-weakening, uh, lira. Now, as I said, Russia have got their own problems, so unlikely they're going to be able to help, while China, I said, probably are going to be unlikely to helping Turkey as well. Because China are wary of upsetting the Americans and an escalation on their own trade war situation. And then for Qatar, it's all about the fact that Qatar probably not even in a financial position to provide enough support of its own anyway. So there are other measures, of course, we talked about, uh, with inflation obviously ramping up, it's already in excess of 15%. And this continuation in the weakness of their currency is only going to fuel this further. So do they need to take proactive means of hiking interest rates aggressively by a few hundreds of basis points? Could be an option. But again, it's this point that Erdoğan has, has talked down these measures that's made the market so nervous about an ability to control this situation. Um, now here's the chart of the Turkish lira, just so you can see the more recent movement. And we did gap up at the reopening of trade. This is when we had that intervention occur from overnight, briefly strengthening the currency, only for it to re-weaken back to around the 7 level at the moment. So this is still really the dominant theme of the market open. Emerging markets having a bit of a wobble, giving the Swiss franc a bit of a lift against the euro. European equities under a bit of pressure once again. And I'm sure if we look at the sector breakdown, it's the banking sector which is feeling the brunt of some of this. The other thing as well that I've noticed this morning from an equity perspective is you've got Bayer, Bayer, one of the biggest German companies within the DAX index, their shares under pressure. Down sharply, set for the biggest one-day fall in 15 years. This is after the glyphosate weed killer has been linked to cancer. This follows something similar to Monsanto last week. And if the biggest component, one of, of the DAX is down sharply, then certainly some downside levels will need to be watched in combination, that is, with the broader risk-off emanating from the Turkish situation. So something to just contemplate for the day ahead. One thing that's been quite interesting, and I have seen one strategist talking about this this morning, is this is just a quick look at the short-term interest rate futures. So federal funds rates to ascertain a pricing of the expectation of a 25 basis point rate hike from the Fed in September. September for them to deliver the third of their four anticipated rate hikes for 2018. And as you can see here, there's a 91.2% probability of that occurring in the September 26 meeting for the Fed. You know, this is only about 6 weeks or so away. Now, what the strategist was suggesting though is that with this trade war situation escalating, concerns that that might have now with this emerging market situation You know, it was back in 2016, if you remember, this is when the Fed first lifted interest rates in this present rate hiking cycle post-financial crisis. They hiked in 2015 December, and they said they were going to hike 4 times in 2016. And how many times did they hike in 2016? Once in December. What restricted them from hiking? Really was predominantly two external headwinds, as they classified them at the time. This being a concern about a Chinese economy slowdown and also that of the EU referendum— two surprising events. Now, what you've had here is a, a return of concerns about China, not only the trade war ongoing situation, but the net result this is having on their local economy, where the currency has been weakening. The stock market has weakened in China substantially. And so you've got potentially an economic slowdown developing and could materially worsen for China. This obviously in the run-up as well. Unlikely Trump's going to take his foot off the gas ahead of the midterms in November. So you've got China back in the fray. So that's strike one. But now you've got replacing the EU referendum, potential fallout and contagion effect if this situation doesn't get nipped in in the bud in Turkey, with their local stock market now at its lowest level in approximately 9 years in dollar terms. So, you know, can the Fed continue to hike rates as of Friday's current market pricing? Well, yes, is what the short-term interest rate futures market is telling you. But just quite interesting to see whether or not this is going to materially alter the Fed's communication. So Fed speeches could be something, I think, just to be mindful of. How much do these external effects outside of the world of US economy, which has been relatively robust, affect the Fed's and influence their decision-making going forward? All right, quick look at the calendar. I'll hand you over to Sam. So today's calendar, very quiet, typical of a Monday. So let's just jump immediately to the week ahead. One thing here that you will see on Monday's notation: Brexit talks between the UK and EU resume in Brussels as of today. My thoughts here are we're not going to see anything particularly new develop today because there's nothing particularly new that's happened. So although those talks are underway, I don't think there's much in the way of anything scheduled, at least, that you need to look out for. But of course, people like Laura Koonsberg, the BBC political correspondent, Faisal Islam, Business Insider's UK reporter has been particularly good with their exclusive pieces that have moved the market. These are all things which I'd have to be aware of, at least on your Twitter account. Going further forward, though, into the week, let's start by country because it's quite an interesting week for the UK. And Sam will have a look at the sterling chart. We've certainly broke some key technical levels last week, which draws into question, you know, where's the bottom of this current route in the pound? Because this week you've got 3 key economic indicators. Starting off with Tuesday, you get UK average earnings data. Wednesday, you get the UK CPI data. And then Thursday, you've got UK retail sales data. So 3 key metrics, and given the susceptibility under the guise of the political uncertainty developing over a no-deal Brexit, which we saw really was a key driver of pound weakness last week given Liam Fox's 60/40 no-deal prospect talk, then certainly I think these data points could be very influential for the pound and whether or not we can continue this downside trend. So that's the UK. Looking at China, there's a couple of key things. You've got industrial production, retail sales, fixed asset investment, foreign direct investment all happening overnight. And so these are all important indicators because the Chinese economy has been slowing down ever so slightly, which has been— I think it was their manufacturing PMI we saw 2 weeks ago was an 8-month low, as the effects then potentially of what the trade talk implications have started to feed through in terms— it's into the real economy. So China's quite key. And then from an earnings perspective, we're pretty much coming to the tail end of US corporate earnings. This week's kind of major dominant sector is the brick-and-mortar kind of retailers, culminating in Walmart's earnings, which are going to be on Thursday pre-market. So they're the key things. US data obviously littered in throughout. Uh, retail sales from the US due on Wednesday, has some housing data on Thursday. I think it's the preliminary Michigan sentiment report on Friday. So yeah, certainly a couple things to get your teeth into. All right, that's it from me. I'm going to leave you with that and I'll let Sam go over some of the charts, but I wish you all a great week ahead. Thank you very much.

Hi guys, good morning. Yeah, just having a quick look over to start with the dollar pairs and really from sort of where I left the office last week on Wednesday, the dollar index has really pushed on, hasn't it? Now 96 and above, 96.3 really has continued to sort of push on and this morning, just now. Euro almost at its low. Looking at a bit of a longer chart, you can see it really was a good opportunity, wasn't it, where we had the, the breakthrough in this trendline using those lows, came back to sort of retest it almost as well a few days later. And, and the dollar really has extended its gains. And it's like 3 days in a row looking back. Well, where the next sort of level support could be be from a market, uh, sort of level. I mean, you're going back here now looking at sort of July last year, strong support perhaps just a bit below, just above 130 if we were to continue to go down. Looking more intraday, I think obviously you've got to go with the trend at the moment, uh, with the downside being the favored way here. A bit of a break of the low and you've got the S1 just below that. I think obviously for these kind of markets, you prefer to short as high up as possible. So maybe a case of sort of waiting to see what happens around here before getting in too aggressively. Might be that if we weren't to retrace the break of the low of the day, and S1 to see that come back as an area of resistance later on, you know, if we can break through to come back, could be a bit of a trade I'd like to see happen. As I mentioned, pound coming down, uh, to its low, found a bit of support on, on Friday, uh, afternoon sort of lower point. We've just had a little bit of a breakthrough there to come back into the range. The pivot has offered a good level of resistance. Should we make it up there again, I think you'd certainly have a bit of attraction there for people that would like to look for the short. Friday's low bang on S1 again. Maybe if we can get a bit of a break, might be, uh, worthwhile looking, uh, a bit of a short. Where are we in the longer term of things? Let's have a quick look, get the pivots away. And you can see again testing these levels from last year, August, uh, 2017. We've had a breakthrough key. Let me just move that above the camera. Key support from a sort of technical area, you've got the high of March 2017 and then the low of June at 126.30 on the futures. If we can get back down there, you should see a decent reaction. Having also broken through 129 last week in the lower part of that trend channel, it does seem it's pretty one-directional for now in terms of the weakness for the pound against quite a few pairs. Worth as well, just looking at this morning, uh, the DAX. Let's put up the pivots on here. Hasn't filled that gap yet, but the low of the day has been— you know, you can see here it's been hit once, twice, three times. I'll be keeping an eye, uh, on this low should we get down there again. If we were to continue to, to push a bit lower, you could see the sort of 5th of July low as an opportunity of support to come through. But we've, uh, can put this onto a 5-minute chart. You can see how well that's been defended. That, uh, you'd have expect a few stops around there to get triggered if we were to come back down. Equities in general just, you know, retreating again this morning. So worth keeping an eye on the, on the NASDAQ, uh, around this area, not far away from its low. As well. S&P, in terms of, of this on sort of a longer-dated chart, I think an area to, to be aware of— let me just remove the pivots just to clean this up a bit— uh, it's going to be around this sort of 0.2792, give or take. You had the, the high from middle June, 13th of, uh, of June there. We came back and tested quite a few times, so I'd be expecting quite a bit of, uh, well, quite a few stops around here should we get down there this week. It would definitely be an interesting time because you've also got potential trend line to sort of match up from there as well using these previous lows. You can see quite an interesting level should we get down there, and it doesn't seem we're, you know, going to be too far away from from there as well. The sentiment this morning slightly negative, uh, on equities. Dow Jones and NASDAQ looking very similar to the S&P in that we're just a bit above the low of the day, but sentiment remains to the downside. Oil, let's have a little more of an intraday chart and just make that come across. So where we've just found support, now we We had a decent reaction on sort of the high of Thursday. We broke through that on Friday. Now we're just finding a bit of support there, just, uh, just above the pivot. So definitely worth keeping an eye on this sort of reaction around here. Should we hold or, or break through, I think remains to be seen. The overall picture of oil, for now, I'd favor the downside. I think we, we have a bit more left in this move. And I think we could sort of drift back lower. And 64s is an area I'm definitely interested in. Whether we can get there this week or not remains to be seen, but just sort of following this, this trend lower. Um, so if we can break through that high on Thursday, we might get a bit of a continuation, uh, below the pivot as well. Gold— I see a couple of people were interested in this, uh, chart this morning. This morning with the break of that, that low of the day, and then the S1 and Friday's low just having a bit of a bounce, uh, now a bit of a retracement, a bit of profit taking come through. I think again probably worth keeping an eye on those lows should it come back. Uh, S1 has already, already worked as the, the classic, so I'd be a bit careful about taking that on again. Previous low of the day around 12:15 on the futures, uh, should be a good level of resistance as well. So dollar still strong, sort of accelerated away from that 95. And in terms of the dollar index, it's got a bit of, bit of room, bit of free air to go, you would expect. So definitely worth keeping an eye on, on the dollar this week. And obviously the dollar pairs, euro and pound, under still a bit of pressure this morning. Aussie dollar similar in that, not far away from It's, it's low, but just below the low of the day you have the S1. So it might be for all these pairs, the idea could be, or potential idea I should say, is waiting for the lows and the S1s to, to have a clear break, you know, down to sort of 72.50 for example for Aussie dollar, and then have retracement using the previous lows as a good level of then resistance. So something to think about for the remainder of the day. Data calendar, as I mentioned, quite, quite thin, so not expecting too much from, from that perspective as well. Any questions, as usual, please, uh, get them in the chat. Dollar remaining strong, equities under a bit of pressure. I'll be keeping an eye on the DAX should that come down to that low again as well. We'll post a couple of sort of longer-term charts uh, with Tex in the chat later on. But I hope you have a good day and a good week ahead of you.