Morning Briefing - 16th August 2018

Okay, very good morning, Thursday 16th of August. Hope everyone is well and getting the briefing underway to kick things off. Um, relatively, if you can call it passive open, uh, comparative to obviously some of the stats I'm going to run through, uh, the market is now kind of taking in a broader global context. Some certainly interesting statistics are mounting on the emerging markets emanating, of course, from the situation unfolding in Turkey. But for this morning, let's look at the broader asset classes we've got in front of us here. A little bit of a gap up that we've had in the DAX, but already has closed that gap. US index futures marginally positive. It does come after generally weakness that was seen yesterday. A little bit of underperformance in the the NASDAQ. A lot of people looking at some— obviously the, the Chinese tech names are so big in this, this current environment. I have become ever growing larger, such as Baidu, Alibaba, Tencent. And it was Tencent who had some earnings which were particularly dismal, that saw their shares fall, and some of the associated Chinese tech names of an equally large magnitude also fell. And if you think about the NYSE's FANG index, that does include those Chinese names, not just your kind of traditional FANG names. So these ones are called the BATs, the Baidu, Alibaba, and Tencent. So might explain a little bit of the Nasdaq movement. But otherwise, we've kind of almost just— feels almost like we're pausing for breath before the next kind of meaningful move, if you like. and predominantly seems to be when the US come in that we really start to see things kind of pick up pace in terms of overall direction on this EM kind of concerns. So T-notes are marginally lower, but just giving back some of the gains that we've seen yesterday. Gold's had a nice bit of a rebound, but as we're going to see, this is just like a minor reversal on what has been a really Quite aggressive sell-off in the yellow metal. And elsewhere in the currency market, the dollar, you know, think about the dollar index. We were talking about a 94 handle only 2 weeks ago or so. You know, we're now talking about the dollar index being weaker this morning, but it's 96.5. So still elevated in a kind of broader context away from the intraday, but down slightly, which has meant that both major pairs, EURUSD and cable top left, have had a slight slight reversal. And then obviously for the, the latter, we're going to be looking out in about an hour's time for the release of UK retail sales to kind of conclude then the, the suite of economic data we've had from, from Britain, uh, with the CPI yesterday and the wage data the day before. So quick look though at a few things, obviously talking about the main focal point, which is the emerging market situation. So this is the MSCI Emerging Market Index. So this is kind of a good barometer because it's kind of like a composite pulling together all the different emerging market indices into one kind of broader tracker. And as you can see here, the emerging markets tumbling the most in 6 months yesterday. Simultaneously, what you're also seeing is then this moving into bear market territories. Investors spooked by a commodity price rout. In addition to this currency turmoil, lira, and then feeds on effects to those other currencies. And of course, disappointing results from Tencent, as we just said. Now, a good summary, I guess, of, you know, or recap of what exactly is and why are these things happening. Well, on the emerging markets, they've been under some pressure for a number of months. It was almost as if you needed— it's almost if you had all the coals were ready, the petrol was there, all you needed was the ignition to set it alight, of which I feel was Turkey under Erdoğan. But concerns over trade wars have weighed heavily, and rising US interest rates— if we go into like the 7th interest rate hike, we're going to anticipate the 8th and the 9th in 2018. the dollar's kind of renaissance have dented the kind of confidence in emerging markets and contributed to crisis in more vulnerable countries, which are certainly dependent on capital inflows. Those countries being, as we've discussed in the prior briefings, you know, Turkey, obviously crucial that they're financed via external measures such as the bank loans that they typically receive from the likes of Spain. Spain, Italy, and France. Argentina would be another kind of case in point in that, in that respect. So looking elsewhere, the other thing I wanted to look at here was, well, that's Tencent price, that Chinese firm we were just talking about. There's copper, because copper, as the FT stating here, widely seen as a barometer of economic growth. The reason for that is because it's seen as an industrial metal, particularly prevalent when you're talking about China. And obviously China's been in the midst of an escalating trade war with Donald Trump in the US. We have seen this now meaningfully impact then people's forward-looking confidence about the potential of growth in China. And so copper consequently has fallen. You know, weaker growth in China equals weaker demand for these types of industrial metals, these goods which are used typically for construction, wiring, consumer goods, so on and so forth. So that too has pushed the metal also into bear market territory. And one of the things here with Aussie dollar I wanted to just have a look at Now, Aussie dollar, when you start talking about these, the kind of currency as a proxy for trading, then people's perception about the economic prospects for China. Now, the Aussie dollar has jumped overnight. So one thing to be aware of, the Australian unemployment rate did come out last night, fell to its lowest level in almost 6 years. So that's what this is here, is that particularly positive jobs data overnight that's come to the, uh, to save the Aussie in what has been. So this is the 30-minute candlestick to encapsulate that overnight rally appreciation we've had of the, the Antipodean currency. But if you look on the daily continuation, you know, although we bounced, you know, about 60 pips or so from that original low, and this is the the Aussie future. You know, we have been under an incredible amount of pressure really since we were up here. If you look at that double top, obviously, that we were printing back in the summer of last year, right at the beginning of the year, to give you an idea in terms of percentages, roughly from peak here, which was only the beginning of the year, to where we are now several months later, This is about 11.5% move, and certainly, you know, breaching of some of these key technical points. I mean, the big test was here. You can see how the market responded originally about 5 or 6 weeks ago, finding support twice meaningfully on that previous low in Q2 of 2017. Before then, when that broke, really quick assault on the market down to the next point of where we are at the moment, 72 handle. Obviously the next one of significance for the Aussie, more broadly speaking, should we remain heavy— and this, this isn't so much, although, you know, this is one thing I heard Sam talking about yesterday with kind of the, the UK data. Okay, UK inflation was in line with expectations, and possibly you might think, well, actually this has increased, it's stopped this remove lower inflation. It's gone back up, actually, albeit as expected. But maybe the pound would rise. But you can't detract from the bigger picture here, which is the depreciation of the pound amid the kind of growing concerns of no deal. And it's kind of the same thing with the Aussie. OK, the unemployment rate is the best situation. It's the lowest amount of unemployment in Australia overnight in 6 years. There's a lot more going on than just that, though. And the trade situation and the overarching importance of the trade relationship, that Australia's dependence, if you like, on China's economic performance means that, I don't know, I still think that this market is going to go lower, at least for the time being. Because if I think about what is the key initiator of this volatility, it's Donald Trump. And with the midterms not until November, is he going to take his foot off the gas on China? As we're going to look in a second, he's also being pretty stern with Erdoğan, which is only going to worsen the situation and people's fears on emerging markets. So that does occur and it impacts China further, well then that 7146 will obviously be a really interesting point should we get down to that, as and when, because below there it starts to open up potentially other movements. And obviously 70 psychologically would be a big one. So things to have a look at is, you know, keeping an eye on things like copper. But this is a commodity rout, it's not just about copper. Now let's just remove the Aussie here, let's just check out gold. Similar setup, a bit of a rebound overnight as you can see here. Uh, this is the low point seen in the Asia-Pacific session before we've moved higher. One thing that's been working out quite nicely here is that, you know, kind of forget the flight to quality traditional moves. Obviously, if something massive happened, that might occur. But what's been happening here is more of a dollar play on that inverse relationship. The dollar's been appreciating and that's been leading to this. Dollar appreciation has seen a dramatic fall in the price of gold over recent months. I mean, just having a look. Measure it up from a peak that we were trading only in April to where we've just touched a low. That's a 15% move lower. Now, this also exacerbated by some technical breaches of, again, very key levels which help to kind of drive the price activity, namely that midsummer low of 2017. You can see how the market again responded as support initially, but the break was really opened up the next quite quick move to the downside. Now, as we've rebounded off that low, what I think will be quite interesting to watch, at least on the intraday, is going to be this kind of level here. So it being the point here of that initial January low point before the move higher through 2017, because as we've dipped through, reversed back, you know, maybe that classic short looking for further weakness to materialize here. So that's gold, but it's not just gold, it's also oil. Because if we look at oil, so yesterday we had the crude oil inventory data, and I'm just looking here of, you know, in the run-up to the data yesterday, this was last week's DOE, and I was kind of talking about the, the broader, again, market sentiment here is that I don't think the market's particularly overtly concerned, at least more longer term, about the inventory situation. Again, it's just a catalyst to feed the broader narrative. The broader narrative being slowing economic growth, what's leading to this bear market in these commodity markets and the emerging market Overall, these concerns all coming at once, the Turkish thing just kind of adding to the trade war situation. And so oil last week saw a really big move through the several hours really after the data came. And then yesterday we broke through that weekly low at the right at the beginning of the week. And you can see when that happened, we really shot lower quite quickly. And now we're trading a $65 handle. Again, how quickly this market has moved. Well, we've lost $5 in basically a week. Um, I guess from here we've got to start looking, well, more long-term, you know, what comes next as we sit at $65. Well, obviously around these levels, very close proximity actually to the, uh, intraday low, is quite key, I think, because you've got the— these levels here of some significance. So definitely would want to see how market responds if we remain under pressure. 64 handle, obviously just beneath, and then that eventual low print seen in June for the big rally higher. Beyond that, then more longer term, I guess then it's more looking at, well, if we continue lower, there's not a great deal here of technical support coming in, certainly through 2018 at least, from where we have been until we get lower. So, you know, this is again, a broader global move, not so specific to an asset. This is a coordinated now belief that things are materially having a negative impact, hence these kind of the connection or correlation, if you like, amid some of these moves. Let's just have a look at a few other things. Talking about trade wars, Um, well, this was one thing we have had. This I think came out yesterday, but just to recap, we're talking about China-US to resume low-level talks in a bid to resolve trade war. This obviously still needs to be watched particularly close given what has been largely a bit of an impasse. This is the— for anyone new in the market, this is a really, uh, quite important thing, is that when you're tracking the day-to-day news to try and trying to make best of short-term price movement volatility. It's all about reassessing what is the most dominant theme of the day. What's quite interesting is, although on a bigger picture, China-US trade talks, global trade wars is the big deal, this emerging market situation has almost jumped it, superseded it at least as a front-page story. So as much as I would be looking at this, I'm not really expecting too much to come. There's certainly nothing new until these talks really resume, where I think you're going to get newswires, source comments, Trump tweeting. Trump at the moment is dealing with Erdoğan, and so as long as he's dealing with that, he's not dealing with China at this point in time. So something to be mindful of. I don't really see it too much of a risk though at this point in terms of fresh headlines. I'll be more looking to the Turkish situation for that. Speaking of that, a couple of other things are, even though we're seeing the, the movements that we have been seeing, as I just said, one quite interesting thing here is that the Turkish lira has actually stabilized. And so this is a look at the daily percentage changes of the lira against the US dollar. The You can see really at the end of last week and Monday, this is when we saw— I mean, look, we're talking nearly 15% loss in a day. Pretty huge moves. We have recovered quite steeply. And this week, actually, we are kind of trying to just tackle this, this big loss of, what, 40% or so over a short period of time. But it is being mitigated by the fact that Turkey really has made it more difficult for foreign investors to bet against the lira as they've tried to stabilize the currency. One thing that's really important today, and I think outside of the calendar of economic data, Turkey's finance minister, and as you all know, the son-in-law of Erdogan, he is planning to shore up the economy and is giving a speech today to investors. So definitely you've got to be looking out for that. I haven't got a specific time. Other than I know that London time is going to happen in the afternoon period. He's not going to be taking questions, it's just a one-way call to investors. Now, anyone who knows their central banking communication tactics, you will know that this is kind of classic where he's going to look to kind of control markets' concerns try to manage them through the power of just verbal intervention rather than physical. Now, this is going to be really key because it almost becomes self-fulfilling. Everyone in the market wants to know what exactly is it that they're going to do. Now, a couple of the things that have been muted or mooted here have been things like yesterday it became apparent— you remember the options? You could hike interest rates, you could do capital controls, however unlikely these things are. You could go to Russia for assistance, whether they have financially the power to do so or not. The other one was Qatar, and actually yesterday Qatar's emir promised to invest $15 billion to the country. So it looks like then they might have a bit of a lifeline, because the US have said that even if they were to release that American pastor detained in Turkey, that wouldn't make a difference and the US tariffs on Turkey would still go ahead. So it's almost as if that option now has been eradicated for Turkey. We did see that obviously with the source comments that moved the market momentarily a few days ago. So that's kind of a non-option. But Qatar have come in at the moment, at least as a short-term stopgap, which means that Erdogan can pursue the certain line. So going to be really interesting I'll obviously keep you updated on the time, but the son-in-law, the finance minister, it's going to be pivotal, I think, for this afternoon's market direction and sentiment for the day. So just be aware of that because I'm guessing— and yet it's not on the calendar, so be aware. All right, wrapping things up, final things here to be aware of. UK retail sales coming up at 9:30. I'll come back on after the briefing and I'll give you a bit more of an update on that. But we are looking for, comparative to previous, a little bit of a bounce back. Then looking at US housing data in the afternoon, weekly jobless, Philly Fed, natural gas storage change. So things to be monitored. But I would say that Turkish speech is going to be probably more influential for markets later. One key thing though to be aware of, earnings season is still ongoing but is coming to a conclusion shortly. This week is the turn of the brick-and-mortar US retail names, but today is important because today is Walmart. So one of the world's biggest retailers, at least in a physical form. But Walmart reports obviously pre-market. Big company, worth being aware when their results come out. I'll double-check it, but usually it's at 1 PM London, ahead of the cash open. It can, if numbers are good or bad enough, move the, the index futures. So just be, just be careful with that as well. All right, that's it. Gonna let you guys get on with things. Obviously Sam will be here all day, so any questions you might have, please feel free to direct those to him in the, the Trading Live chat room. Otherwise, have a good day. UK retail sales coming up about 35 minutes.