Morning Briefing - 17th August 2018

Okay, very good morning and a happy Friday, 17th of August. A couple things to discuss, obviously, in the briefing. We've got the— what was initially a higher close on Wall Street. We've had some news out of the finance minister of Turkey. We've had some information come out of Steven Mnuchin, the US Treasury Secretary, which did move the markets and particularly the lira yesterday. And then we're going to have a look at Brexit, which We've not really talked about that a lot. A couple of things about our dear friend Boris this morning, and we'll have a look at the potential consequence some of the news could have if it turns out to be true. So that's what's on the agenda for this morning. So let's get straight down to how things are looking more broadly speaking. And on the charts, relatively muted open, I guess. You've got some slight weakness seen in the European equity index futures, but albeit fairly moderate. The Eurostoxx is pretty flat. The DAX, just as I speak, making a bit of a push on pivot. So just in the futures, any moves to the downside, first port of call would be the, the kind of low print seen just before the Eurex closed last night at 12:204. Otherwise, US equity index futures pretty sidelined for the moment. And let me just start with that first of all. This is the heatmap that we had from yesterday, so as you can see, it's pretty green across the board. A little bit of performance, outperformance in the Dow. You can see one, well, two real particular standouts from a single stock point of view. One of those is Walmart, so the world's largest brick-and-mortar a retailer. They obviously reported pre-market yesterday. You did see a bit of a response of that in the Dow Future ahead of the cash equity open when their results came out. Why did that happen? Well, the e-commerce sales were up, and actually their expectations are for the full year that they're going to be up potentially 40%, which is an incredibly Powerful number comparative to Street expectations. And obviously this is in a world when they're in direct competition with Amazon, of course. And then they're— from their US sales comparable point of view, they saw their best growth in over a decade. So decent bounce back for Walmart, who have had a really rough ride of things over the last couple of corporate earnings seasons. just given some of the, the shift in the, the kind of landscape to going digital. But it seems like that their push into that area is also starting to pay a bit of dividend now for the company, and their prospects of their e-commerce side of things is going to go up. So that lifted things generally. From a broader macro perspective, of course, you had that report about, uh, US and China looking to resume their trade talks, which is a positive thing because they pretty much come to a standstill. And although the market and Trump and the administration have been somewhat sidelined by this renewed Turkish situation, China saying that they're willing to come back to talks in a few weeks' time certainly is net positive, and that was reflected in market prices as well. One thing, though, you can see here, although it's a wash of green and generally it was a positive day, Facebook shares, obviously a bit of an eyesore on this screen because they were down about 2.7%. So more problems for, for Mark. This time it's in regards to their inability to crack down on hate speech in Myanmar, which contributed to violent attacks against the minority Muslim population. According to some of the investigations that are going on. So more trouble for Facebook in that regard. Does it change, I guess, a longer-term view though of Facebook? I really don't think so. I'm still pretty bullish on that as a single company. Again, it's just about lower valuations to find a better entry point, I think. But yeah, just to explain why their shares bucked the general trend, which obviously was, was quite positive yesterday. Now, one of the things then, just going through some other stories that, um, that also helped kind of positive sentiment just to wrap up yesterday, was the finance minister of Turkey obviously gave a keynote speech where he addressed on a conference call more than 6,000 investors. So as I've said before, anyone who's kind of new to financial markets, this is kind of classic management of how do you mitigate a run on your country's assets, or in this case your currency, one of the things you've got to do is reinstall market confidence. And you achieve that by having a direct, clear line of communication, and more importantly, a definitive plan of how you intend to counteract these things, which is, which is very key to enhance market confidence or restore it in this case. So Al-Barak ruled out capital controls and gave a detailed presentation on the banking sector's strengths yesterday. He said the government is comfortable with the banking sector's FX liquidity and underscored that the ratio of the FX loans to FX deposits of the banking sector is less than 100%. He also pledged to tighten fiscal policy, but the fiscal targets would be announced in September. Some more details then. He also said that fiscal policy will support monetary policy and that fiscal monetary policy mix will be targeted at reducing inflation. Now, quite a few analysts this morning from the bank reports I've been reading, and Credit Suisse being one, if you'll remember, obviously the finance minister in Turkey is the son-in-law of Erdoğan himself. And we know quite clearly what Erdogan's view is on monetary policy, particularly that of interest rates. And so the fact then that Albarak has said that they're going to use a fiscal monetary policy mix, people have taken in the marketplace, at least from an investment point of view, is quite a positive because he's not— he's not just referring to only a fiscal policy approach. So maybe it's a little bit of softening in that stance. France, so to speak. And so overall, investors reacted positively to, to that speech, in addition to the, the kind of positive developments in potential initiating talks once again between China and the US, in combination with Walmart. And consequently, we had a bit of a positive day. In fact, for the emerging market equities, it was the first time we've moved up, closed higher in 8 days. So just to put it— just to put this week in a bit of context, one thing though is— well, let me just quickly bring up a chart and we can look at something. Is this— one second. So this is the Turkish lira, and you can actually see here Turkish lira has been pretty much from Tuesday. It's been recovering all week. So this is looking, um, at the Turkish lira versus the dollar. So obviously it got down to the lower bound. I think the actual low point was like 7.2, but now we're trading, you know, more like a 5.75 kind of area. So we have continued to move back. However, we did see some paring back of these gains last night. Because the US Treasury Secretary Steven Mnuchin came out and made a comment in a speech saying that Turkey faces more sanctions if Pastor not released. So Erdoğan obviously has been quite busy. He's been talking to Macron yesterday, talking to Merkel the day before. He's been talking about potential $15 billion kind of boost coming in various different forms from Qatar. The point here though is that the US are suggesting that they're ready to put on more sanctions on Turkey if Erdoğan refuses to release that American pastor. So this then can obviously would reignite the situation and cause potential more friction and a more of a run loss of confidence. So you almost had Turkey doing quite a good strategy yesterday via the finance minister. However, it has a little bit of that positivity has been taken away by the comments from US Treasury Secretary last night and Trump maintaining that, that kind of policy line on the foreign policy stance. So that's kind of left us a little bit, I guess, net neutral, if anything. So Hard to really call where we go from here for the day. I'd prefer maybe for the market to just show its hand from a sentiment perspective because we've kind of gone through quite large swings between being a little bit more overtly risk-off, which has been the predominant theme for the best part of the week, to now a bit of recovery yesterday to where we sit now, which I kind of classify as a little bit more neutral, certainly from a US equity perspective. I mean, just looking at— let's just have a look at the S&P here. You know, look where we are considering the amount of press coverage we've had, this kind of panic about Turkey, emerging market crisis, spillover, contagion. And look where we are in US equity markets. I mean, you wouldn't even thought anything have happened. I mean, looking at the S&P here, we're obviously quite a key level here. This is looking at a daily continuation chart, is around this 2849.50 mark, because that here you can see was the late July highs. We found resistance there on the recovery yesterday and already this morning. So any push to that level, if we breached, it would not be unsurprising to see a push up then further to at some point retest up at that 6375 or 3/4. So Yes, things still looking quite bullish here from an equity perspective. On any pullback, I guess it's, well, where's the most opportune point to enter the market? Actually, if you're being a bit more conservative, then possibly, you know, these lower bound levels here could be quite interesting where we've previously found resistance and support could offer quite an interesting entry point if you're still of the belief that, you know what, given corporate earnings season on the balance being particularly positive And given trade talks are moving in the right direction for alleviating trade tensions, and if your belief is that Turkey situation will not spill out into a broader globalized issue and will be contained, then things still looking quite positive. I think if we look at the Dow, you know, the Dow's as well quite a critical level on the daily charts. So you can see here we're right there back at a test of what we would have had from 10 days ago exactly. To where we are right now on the futures market. So you can see the strength of the bounce that we saw yesterday in the Dow was particularly aggressive, one of the biggest, you can see, single candlestick positive days that we've had. I mean, look, just looking more broadly, pretty much since we go back to all the way to Q1 of this year, just to put into some perspective how positive yesterday's session was. So some upside levels certainly quite key to watch, I think, US equity-wise. Breach could then just add to some of the upside movement. But a lot of this is contingent, as I say, whether I'd want to commit to that. There's quite a few things obviously from a news point of view to monitor. Looking at gold, let's just have a look. Gold obviously having a bit of a bounce on what has been a bit of a wicked ride to the downside. 14-month lows, or even further than that. I mean, looking back on here on the futures chart on the daily, we're going all the way back to— where are we— December of 2016, early part of 2017. We have recovered. I guess if we continue to recover, a couple of points to, to look out for, pretty much where we are at around these present points, so around that 1180 mark. And then kind of scaling it up from these previous points of where the market turned on its movement higher seen through the first half of 2017, and obviously the 1,200 handle being particularly key. Okay, having a look at the pound, seen some pretty interesting movement in the pound this morning actually, and not too much to explain it on from a tick-by-tick basis. But the point I'm referring to here is I just reduced the time frames is this was this morning. So, uh, UK European participants came in, uh, pretty sidelined overnight in Asia-Pac session. We then rallied all the way up from pivot, hit R1, came all the way crashing back down, broke pivot, and really the late part of Asia-Pacific session low, and we've gone back above pivot. Broadly speaking, it's a bit of a mess overall, but you can see technically how it responded here because there really wasn't much in the way of direct news flow. But there certainly was something in circulation when the pound started to pull back. So let's have a look at some of the news stories which have been doing the rounds this morning for, for Brexit. And here we go, this is our Dear old friend Boris Johnson. According to reports that have been circulating desks for the last couple of hours, Boris Johnson apparently being urged by his supporters to consider another bus tour to campaign for Brexit. If you remember, obviously BoJo was particularly unhappy with the state of play under Theresa May, and after the release and publication of the white paper that's in existence, of which Theresa May is on course to deliver, at least for the moment, he decided to resign. This was after that flurry of more Brexit-minded people like David Davis, former Brexit Secretary, and then Boris himself resigned. Since then though, Boris Johnson's obviously been caught up in various different— I'm not sure if you can call them scandals, but situations where has divided opinion about whether he's right or wrong to say what he did about the issue of burkas. But now this report's doing the rounds, and could he potentially be, you know, could he capture what is a very divided nation by the stronghold and You know, I think one thing that British politics is missing is an absolute person of full conviction and belief of their political stance. And I'm looking at this purely from the point of view of not giving my opinion, but I just want a politician to stick to what they're saying, to deliver what it is that they're promising, and to really grab the bull by the horns and run with it. That's the only reason— that's the only time I think you can really gain some kind of traction with the public and for them to get behind you. And Boris Johnson, in my mind, is lining this up for Prime Minister. And I would not be surprised at all if you see this chap riding around the country, particularly in the Northeast, with a big bus saying "Make Brexit Great Again." Mark my words. It's coming. Now I'm not saying that's right or wrong, but I'm saying actually I think if he did that, he would get an incredible amount of popularity, actually. One thing it obviously will do is create even more division between the two sides, i.e., being pro, kind of, Europe and Remain or Leave. Let's have a look at a few other things then. This came out, and this is a political correspondent who's been fairly on, uh, on point as we've been tracking the issue of Brexit over the period of the last 18 months. And he said— and I do put quite a high degree of credibility to this chap— he said a source close to Boris Johnson says reports he is planning another Brexit bus tour is total and utter bollocks. Not my words, Boris Johnson's words, apparently, according to the source. So again, as per, you know, kind of news that you hear, and I know Piers often refers to this quote, but you know, there's no smoke without a fire, and I definitely think that Boris Johnson has much more under his sleeve, and I think as much as a buffoon he might come across as, as times, I think he is quite tactile. He definitely has a plan. Looking at his odds, his odds actually ever since his resignation have been slowly increasing as to his favorability as the next potential replacement for Theresa May, and the odds at the bookies are narrowing in respect to Boris Johnson now. Is quite clearly the next person, if Theresa May was to go, who is seen at the betting odds at least as the person who will replace her. What does that mean for markets? Well, Boris has some success. I did see a funny tweet from an FX strategist at a bank this morning. And when the pound was moving early, was moving down earlier, he said, it's pretty clear then that the algos are programmed to sell every time they hear Boris's name. Name. And as much as that's quite funny, that's actually pretty much the state of play, because we know Boris Johnson's kind of political tactic that he will deploy is most likely that to be that of a harder Brexit. And so the risk then of a no deal increases, and we've seen only in the last 2 weeks what that has meant for when Liam Fox, the trade secretary, made that comment for the pound. We broke that trend line lower, and it just meant that although we were trending down in cable, the speed and ferocity of the fall increased. And obviously we broke quite a key influential level here, longer term, being these circles here that I've identified, going all the way back to post-immediate EU referendum result to where we are. So a good upside level, I think, on any reverse to be potentially short again. Is that 2783, around that area, potentially higher up at that trend line. We come back up to there for then movement back down. Obviously breaking those low points of the, uh, June lows from last summer opens up the prospect of 125, probably is the, the most near-term target. This is all coming if some momentum gathers behind Boris Johnson and it becomes more evident that he could challenge Theresa May, the more pressure I think you're likely to see on the pound. All of this, don't forget, means that we are actually still— still no one's talking about actually Brexit. No one's talking about trade talks. No one's talking about, you know, what exactly are we going to do, because at the moment it's still a political mess. And the longer this goes on, I think the stronger and more competitive telling the negative forces become for the pound. And something like retail sales yesterday, I think one thing I definitely believe with that is although it was quite strong, it was strong because of hot weather and the World Cup. Well, if you look at retail sales in the UK, which is obviously a key component of the British economy, you've had a royal wedding, you've had incredibly consistently hot weather, and You've had the World Cup. Well, the wedding's done, and unless Harry and Meghan get divorced and remarried, then that's out of the window. You've then got the World Cup concluded, and the hot weather can't last forever. And looking at the broader, I think, situation economically, I do think that once these figures, once these seasonal factors start to wear off, or these one-off items. I still think it's going to get worse for the pound before it gets better in that respect. So I know we're talking a little bit more broader context and longer time frames, but just a few things to be aware of. I'm sure Sam will put a couple of intraday setups for the cable because I know he's got his eye on that as well at the moment. Okay, quick look at the calendar. For the session ahead, and it's relatively quiet. We do have eurozone CPI coming out a bit later on this morning, but bear in mind these are final readings. So on the year-on-year perspective, we are looking for an unchanged figure at 2.1%. Going further forward into the afternoon though, we do have any of the guys in Trading Live looking at the CAD currency, always very susceptible to quite high balance bouts of volatility on the back of, uh, kind of tier 1 data. And you've got CPI readings coming out this afternoon at 1:30. No major US 1:30 data, but we do get the University of Michigan sentiment that's coming out. This is the August preliminary report. Where do we look? Where do we stand on the statistical data with Michigan? Well, it's been a bit of a non-event. It's been incredibly consistent actually over the course of the last couple of months. Looking at the expectations for Michigan, we're expecting 98. The previous reading was 97.9. Got a range 96 to 100, 96 down here to 100 up here. Either side of these I think is kind of inconsequential for Federal Reserve policy because if you stick this on a maximum chart— well, let's look at 10 years, a little bit more telling. You know, University of Michigan confidence has been progressively improving over time. And being at 100, even if we were to drop down to 96, is still incredibly high and not something I think which would be a concern for either the administration, the administration, or the policy setters of the FOMC. So something to be watched. But I think probably the more astute thing to do today is to look for developments on the Turkish front. By that I mean that, does Erdoğan come out and make any more inflammatory comments? And indeed, likewise, does Trump tweet anything of a similar nature to what Steven Mnuchin said, i.e., to escalate the situation? Or contradicting that, is there something that happens in order to ease the situation? And that is In this sense, you would be looking for a risk-on move, probably further equity appreciation for those US indices. Some of those key levels in the upside could be interesting for a breach. And then the other thing, anything on China. But again, I would say the more dominant theme here, at least from the frequency of news headlines and what the general market is focused on more so at the moment, is the Turkish EM situation. But underlying this is China, and things on China-US relations are in a positive state at the moment. So if they're in a positive state, there is a risk of it becoming worse, and it would only take one Trump tweet for that to materialize. And given the kind of run-up in the equity markets yesterday, you know, and at these technical points of resistance, could it be a good point for some profit-taking on those positions? And you could see some selling pressure should those particular news headlines develop. So a few things to contemplate. I can see Sam's put some charts already into the Trading Live room, so please do check those out as well. He'll be here all day, so any questions you have, just let him know. Otherwise, that's it. I'll let you guys get on. Wish you a good day ahead and have a great weekend. Thank you very much.