Morning Briefing - 1st October 2018

OK, good morning, welcome. Quarter 4 of 2018 begins. What I'll do in the briefing this morning, we're going to just quickly check back, review Quarter 3, see how various different assets performed. We're going to be looking at the kind of main factors that dominated things into the end of last week, talking Italian deficits, talking US inflation. We've had China data over the weekend. We got Plenty of political risk as we look ahead this week. Another Trump victory over the weekend with a Canadian trade deal agreed. We've got the Conservative Party conference, we've got the ongoing US-China trade war, and then on top of all of that, it's the first week of the month, the first week of the quarter, and we'll be checking out the economic data calendar that is rammed full of Tier 1 data rounding off the week with the US labor market report and the latest update on job creation and more importantly wage growth. So packed, packed week ahead, definitely looking forward to it. I'll come showing you the charts as normal here, but let's, um, I'll come back to these. Let's just start by having a look at the quarter that has just finished, so July, August, September. Rounding off to an end last week. And this is just looking actually firstly at the month of September. Actually, no, it's not. Sorry, here's the one that's looking at the month of September. We've got basically mostly equity markets, the kind of top two-thirds of this table are looking at equity markets from different geographical regions. And then looking down at some other assets down the bottom. I mean, the clear winner in September, of course, standout performer was Brent crude. Almost 7% higher on the month. Japanese stocks, the TOPIX here, next best. US stocks were a little bit more mixed, as you can see. The S&P only just about managing to eke out a positive month. The Dow did much better than that. The Nasdaq was down on the month, probably because of these FAANG stocks that took a pretty big hit. But the, the, the all-world index stock market tracking the whole world from an equity perspective came in just about 1% higher, so not really much in it. Similar, the S&P, DAX slightly down, so it's actually quite a flat month for most, with the FANGs suffering. Japan, nice outperformance along with Brent crude. I think it's much more interesting when you look on the quarter, which is what this chart's looking at. I think generally speaking, it's definitely been a great quarter for U.S. equity markets. As you can see, the, the top 3 performing markets in this list, at least in the quarter, were all US indexes. So the S&P, the Dow, and the Nasdaq powering on. And the Dow Jones 9% up over the course of those 3 months. This is, I would say, you know, just further sort of upside really spurred and driven by the earnings season that we had in Q2 that showed that US companies were still enjoying bumper numbers as a result of Trump's tax cuts. We also had, you know, evidence that the US economy was growing very powerfully. And so despite the fact that this did mean the Fed, of course, raised rates last week and have signaled another rate hike in December, despite that, US equities really, really powering on. And almost like a— on top of all of that, in terms of a really strong US economic situation, it's almost like the US equity space is being that sort of safe haven space for equities when you're looking at the global situation. We'll come on and talk about China in a minute. But, you know, China, China's stock market down 20% this year. Europe about flat, but the US really powering on. The FTSE All-World did pretty well. So, you know, as quarters go, pretty strong for equity markets generally. The FTSE 100, not so. We definitely had a negative quarter from a Brexit point of view, certainly towards the end of quarter 3. China then, interestingly, this is that divergence as the US trade war with China, you know, escalating and escalating and culminating in Trump adding tariffs to a further $200 billion worth of goods coming from China into America. That puts the kind of total situation— the US have now added tariffs to, yeah, broadly about 50% of all goods coming from China into the US. So China suffering more at this point. But then, yeah, certainly look at the bottom two. Quite interestingly, the two commodities on this chart going in opposite directions, with oil very strong, powering on as a result of this Iranian crude risk, as we're expecting US sanctions to bite, and perhaps as much as 1 million barrels of Iranian crude going offline as we go to the, you know, towards the end of the year. And then you had the OPEC and non-OPEC countries meeting and actually not— and thinking, well, you know, we don't need to raise production any more than we're already doing. So that's certainly been the catalyst that's boosted prices. We'll have a look at the oil charts in a minute. And gold taking a hit, mainly because of dollar strength, of course, as the Fed got more hawkish, as inflation in the US ticked higher, as economic data powered on, and that almost inevitability of a third rate hike plus guidance for a fourth in December. So it's been a strong quarter. Yeah, it's been a strong year for the dollar. Actually, I'm looking on the quarter, surprisingly not that strong. The dollar index here, let's have a look at September. I see the dollar index flat. All right, maybe I'm wrong. The dollar index, the rally was really the first 6 months of this year. Flat for September, hanging on to those gains, you might say. But we'll have a look at some of the FX markets in a minute. So yeah, that's the kind of shape, um, of the quarter. And now we hit the last and final quarter of the year. And I mentioned just a minute ago that perhaps Q2 earnings were a good catalyst for US stocks in Q3. So let's see if the same happens again, because of course, as we track through October, we're going to start to get the Q3 earnings reports from US businesses. And we want to see if this, this tax boost is still having a very positive effect, or are we going to start getting companies looking out into 2019 and starting to kind of just maybe dampen expectations? Maybe we're going to start to see some forward guidance into— sorry, 2019— maybe we're going to start to see some forward guidance into 2019 that's suggesting that momentum might slow a little bit. So that'll be something to look out for. Okay, so that's the, that's the situation by, you know, in terms of how assets performed in the quarter. Let's have a look at some of the other headlines that we've been getting. And let me just see. Yes, on the Trump front, news over the weekend then. Trump clinches rebranded NAFTA. As Canada joins pact with Mexico. And so, you know, this will be, you know, another kind of victory for the Trump camp that he will be, of course, all too happy to brag about via his Twitter account. So this is Canada now joining this pact. Here's an interesting graphic just to show you the differences between the two. So you've got the US negotiating a trade deal with Canada. But it is kind of David and Goliath here because, um, in terms of dependency— so the US— Canada is actually the US's biggest customer. That's in terms of US exports. More— so 18% of US exports go to Canada. As you can see, that's the most. Mexico number 2 at 16%, China number 3, 8%, and then you can see go around the wheel there. So 18%, Canada top, but check out Canada's dependency on the US, a quite staggering 76% of Canadian exports just popping across the border there and into the United States. Obviously geographically this makes perfect sense, but of course it does mean that at the negotiating table, um, yeah, well, the US are holding all the cards. So what's happened is that a deal has been agreed. But, you know, you know how politics works. I mean, let me just show you. There was a big kind of situation around dairy farmers. This is one of the kind of big issues. And what's happened here— and the details around this deal are still quite vague— but we've got a new accord and it involves improved access to Canada's dairy market for US farmers, stronger intellectual property provisions, and tighter rules of origin for auto production. However, do bear in mind that this is just an agreement in principle, and what they've— I mean, the timing of this, because the current Mexican president is actually outgoing, he's finishing in his job on December 1st, so it looks like they've just tried to push this through before he's left. But the problem is that this has to then get voted through Congress, And the likelihood is that this ain't gonna get to Congress until 2019, and by then we'll have been through the midterm elections and we may well have a Democratic Congress. We may well have the Democrats in control of majorities in the House and the Senate. And so actually, it'll be interesting to see— just because this deal has been done in principle doesn't actually mean it's going to get voted through Congress. So that's the next hurdle. But still, you know, certainly this will be— you know, this is a positive step for you, for Trump and his whole kind of trade war campaign. Talking of trade wars, news over the weekend that China's manufacturing data slowed again. And if I take you down to the chart in this article, then You can see here there's two manufacturing measurements. One's the kind of more official, the white line's the, the PMI, if you like, the Chinese official PMI. This is really looking more at the, the larger kind of state-owned manufacturers. The, the blue one's perhaps a little bit more insightful. This is the Caixin China Manufacturing PMI, looking at more privately owned, more mid to small cap manufacturers. And it's this blue line that's touched down on 50. And remember, with these PMI readings, 50 is that kind of critical point. Any reading above 50, and that's showing expansionary conditions within that manufacturing sector, implying of course the output is increasing. Obviously therefore good news for the economy. But anything below 50, then we're into contractionary conditions, and that's where output is shrinking. So back to 50 here, worst reading since the Q2 of 2017, um, and So this is again just more evidence that, you know, you look at Chinese stocks, which are down 20%, and you're seeing, right, that's trade war risk right there. And now you're really starting to see these risks properly feed through into underlying economic measurements. And as it stands, of course, as we know, the, the current situation is that there's, there's, there's no, no timeline for any further negotiations as it stands. Those additional tariffs have been added. Trump has threatened to increase the tariffs on those $200 billion worth of goods by the end of the year if no progress is made. And China's stance currently is, we ain't interested in negotiating as long as Trump is making his threats. So at the moment, Trump is threatening and China aren't talking. So this is currently set to continue, and currently it's weighing on that Chinese equity situation and the Chinese economy more broadly. Um, right, so that's, um, that's, that's the kind of update on the US. Let's look at Italy, um, and let's look at, um, hang on, I had a, you know, another kind of big story in the, um, in the press this morning. If I can just find the one I want. or not in the press this morning, so I actually don't have it. I thought I had a graphic, I don't. I'm going to show you this one instead. So this is Italy, of course, something that dominated the back end of last week, and we'll look at the charts in a minute, was Italy's decision on their budget and their decision to have a deficit for next year of 2.4%. Okay, so minus 2.4%, and when you're looking on this chart, you're thinking, all right, well, that's Well, it's pretty much the same, same as last year, right? Minus 2.3%. But, um, I guess the critical thing here is that the Italian deficit has been downward trending, you might say, for the last few years since the crisis. And the, the hope from Europe's point of view was that this would continue and the deficit in, in Italy would get smaller and smaller and would head more towards a surplus. The official rules in Europe are that You're supposed to maintain a deficit that is no more than -3% of GDP. So this 2.4% thing, well, that is less than 3%. So kind of what's the big deal? Well, the big deal is that Giovanni Tria, who is the Italian finance minister, who's the kind of technocratic member of that anti-establishment new government, He was seen as— and a lot of the press call him the adult in the room when the government is trying to decide on things. And the idea was that Tria would persuade these guys to see sense and to not balloon out the deficit and let's keep things tight. But it looks like he's not been successful in that. And so the news was quite surprising. This is why you had a bit of a fallout in markets. For example, Italian stocks down over 3%. On Friday. Italian yields punching higher to a— I think it's a— well, to test the highs of the year, which is a 4 or 5-year high. You had the euro declining quite sharply and so on. And the reason why we have this fear isn't so much the deficit, because -2.4% isn't a big deficit. The problem is that it's the deficit getting bigger whilst Italy still have one of the biggest, uh, debt situations in the world. Hang on, let me just get to the chart I want. I'm going to show you Italy's debt-to-GDP ratio. We often talk about the US's debt-to-GDP ratio and it up being up above 100% and, you know, perhaps not sustainable in the long, long term. Um, well, when you're looking at Italy's then you'll see what the problem is. Their debt-to-GDP ratio is up at 131.8% of GDP. Now, out of the big economies, it's really only Japan that have got a worse sort of metric here. And this is quite insightful. I'm going to go to a 10-year— oh, this is 10 years, right? Now I'm going to go to maximum. So this is their debt-to-GDP ratio in the long term, OK? And we had a spike in the early '90s and then a trend back to 100. But unfortunately, we went into the global and the financial crisis, we went into the European debt crisis with the debt levels already at 100%. So what happened? Well, they ballooned to 130%. The reason why I'm saying this is because just for other governments, you know, if we have another recession, crisis, whatever, I don't know, 2019, end of 2019, let's say, well, most governments like the US have got debt levels of 100% already. And this is what happens when you have a recession or a crisis when your debt levels are already too large. So the big fear here is that the Italian deficit is going to widen. The debt-to-GDP ratio, which has been flat for a few years, is now going to start heading to 140%. And the, you know, the underlying problem is the Italian economy just doesn't, just doesn't grow very fast. You've got a serious lack of reform over the last decade or two, and the economy is just quite stagnant. And, you know, whilst this anti-establishment government want to spend more money to try and boost growth, it's a gamble because if it doesn't work, if you spend a lot more money and it does not boost growth, well then you got a big problem, and that default risk thing will start to rear its head. This is what happened to Italian yields back in the last week. This is a chart looking back over the last few months and spiked back up towards 3.2%, and that's the kind of double top for the year. So keep your eye on Italian yields as we track through this week and indeed through the next month or so. That could be a key catalyst. And if we look at— let me just switch across to the charts for a second because it wasn't just Italian yields that moved off this news. The euro here, you can see we had the Fed decision last week in terms of their rate hike, but it was the Italian comments that saw things crashing lower, break below the 1.18 handle, and really we've been trending lower ever since. And so, um, interesting kind of double bottom down here at 1.1641. That was the low on Friday, and we found some support there already this morning. Okay, so the euro is under a bit of pressure. As a result of this Italian risk. Just looking at stocks though, as I've been speaking, we have seen stocks rising. I've been talking about US stocks being outperformers generally, and it's certainly the case again this morning. So S&P 500 up through R1 here, which was key resistance overnight. And the key part about that level was it was Wednesday's high. This is before the Fed sell-off. So This is quite an important move. Let me just take this chart out a little bit further. The next stop is the all-time high, which was set back on the— what date was that? The 21st of September. So 2947. Well, I mean, there's really no kind of big levels between here and there. So technically, very bullish or positive start to the week here. Breaking up through that high from last week. And that's kind of setting the tone here. And this is helping to drag— you know, whilst Europe has been struggling relative to the US because of that Italian risk, we're still getting the DAX, um, join in on this. So the DAX getting dragged a little bit higher here. But of course, the S&P is above last week's high, whereas the DAX is nowhere near that, obviously. So the DAX up to 12,300 here. Just getting a little bit of upside on the coattails of, of the US. Okay, so other things to talk about. Let's switch back to my other screenshot briefly and just cover off the other kind of big thing for this week. So the Conservative Party conference begins. We've had the Labour Party conference, of course, in Manchester. This is the Conservative Party conference beginning this week in Birmingham. You know, you've had Boris Johnson again attacking the Chequers deal over the weekend. You've had Dominic Raab basically saying, right, I'm going back over to Europe and I'm gonna try and continue to persuade these guys that the Chequers deal is the only way forwards. And then we've got You know, all of these politicians, all of these Conservative Party politicians speaking. Here's quite— hang on, I've got another graphic for you if I can find it. Here we go, this is the one I want. You might remember, because this week's the anniversary of just one of the most extraordinary performances in modern political history. That was— sorry, has anybody got any cough sweets? That was Theresa May's speech at the Conservative Party conference, 4th of October 2017, where she had a coughing fit, and it was just one of the most excruciatingly painful things I've ever seen. So it was the anniversary to that this week, so I'm sure there's going to be a few gags, uh, related to that as she begins her speech. Um, but this is what happened to the pound. I mean, this is a year ago now. I don't think this is the chart of now. This is a year ago. She spoke, it was an absolute disaster, and the pound came under, you know, massive pressure. Actually, what's interesting, though, we are trading at 1.31. We just got a bit of upside. Let me quickly flip back to the charts because you've seen cable just move up through the pivot level, which had been some resistance during the Asian session overnight. But up to 1.31, which is where we traded. Well, I guess that was— we traded down to 1.31 in the aftermath of Theresa May's speech at the last Conservative Party conference. But, you know, generally speaking, of course, the pound, if we If we just go out a little bit in time, the pound's kind of definitely taken a hit, of course, as this Brexit— as Theresa May got mugged in Europe, as the press would like to say, and Europe not liking this Chequers deal. So obviously the pound's been under a lot of pressure. What's key on the resistance front is the 1.31 handle, by the way, which was some nice sort of key support for last week off the back of the, well, in the end interpreted as a hawkish Fed. Off the back of that, dollar strength took us down to the 131 handle where we kind of found key support. So we broke that on Friday, so we're back up to that point almost now. So watch out for some resistance around 131. But yeah, certainly the, the Brexit headlines will be coming thick and fast. The, the leadership um, or, and slash, potential general election speculation, uh, will be rife as we go through this week as, as the Conservatives have their party conference. Um, finally then, just one more headline for you. Uh, Brent oil rises to 4-year high ahead of Iran sanctions. Um, so we've known about this of course for the last few weeks. If we go to the oil chart, we've had a a great period of upside. I'm showing you WTI crude here. Um, let me just get rid of some of these lines and start again. Uh, just one second, sorry. Um, so obviously, and as I was saying last week, um, we had a kind of key break of that, um, the start of September high at $71.40, and that— and I was saying on the the 24th at the start of last week that, right, key move, you know, we've broken up through $72 and that should now set up that, that kind of test of $75. So this is playing out. We had a very punchy session on Friday, big moves higher. And, you know, we're well on our way to now, you know, having an assault on that $75 handle. Now, Brent crude has already broken its summer high. So Brent crude is trading up at the highest since 2014, and that's because, of course, Brent crude prices are more sensitive to the Iranian supply situation. So this is still the same old story. You don't have new information flow here. It's just further evidence that people are buying less Iranian crude even before the sanctions hit. And of course, this is that weird situation where it's US sanctions, but actually the US don't buy any Iranian crude. But they're using and flexing their muscles to persuade their allies, let's call them, if Trump has any allies, to try and persuade their allies, strong-arm their allies to stop buying Iranian crude. Like India, for example, are reducing their purchasing of Iranian crude, possibly thanks to the US muscling in and trying to persuade them to do so. So I We're expecting Iranian crude to go off— well, no, not offline, a million barrel drop. And so this is feeding into this despite some dollar strength through this period, despite some, some US hawkishness. We're still getting this oil powering to the upside. And, you know, you're still getting, I guess, the hedge fund community being very bullish and very long. And when you think about it, on the Brent side, the Brent crude is $10 higher than this. Now we're not far off. I mean, dare I say $90 and dare I even mention the $100 handle? Is that too early? But anyway, something to think about in Q4 if this Iranian situation does pan out as people are expecting, or let's say it's even worse. So certainly oil punching higher on Friday and another kind of asset that's, that's leading and something to keep your eye on. Just, uh, yeah, okay, right, that's enough in terms of reviewing things. I want to just now finish by looking at the data calendar, and as I suggested at the start of this briefing, it's rammed packed full of all sorts of stuff. Such a busy week ahead, not just on that political front but then on the economic data front as well. It's always the first week of the month that's the standout for for Tier 1 data. So we're going to get the, all of the PMI readings. And actually, whilst I'm saying that, we've just had German PMI numbers come in. These are final readings for Europe, so they're not quite as market sensitive because we've got preliminary readings for the European PMIs a week or so ago. So Germany in line, 53.7. France in line with expectation, 50.5. Italy just a touch below expectation at 50. We had expected 50.3. So China Golden Week. Ah, yes. The other thing Anthony's just reminded me of in terms of, I guess, the trade war risk and having Chinese markets as that sort of guide. Well, not this week. It's China, Chinese Golden Week, which means you're going to get— that means markets are shut all week this week. All week. Yeah, so Chinese markets are shut all week, so we're not going to get any kind of lead coming out of Asia, which does make things a little harder in the European morning to kind of gauge sentiment. Without China to, to have as a guide, it's a little bit more tricky. Plus that trade war risk thing, you know, Chinese market reactions overnight are a great barometer for that trade risk generally, and we're not going to have the luxury of that either. So just bear that in mind. But We're going to get UK PMI data at 9:30, where we then got the key reading of the whole day really is the ISM manufacturing out of the US. Are we going to continue to see, you know, powerful economic data coming through from the United States? Most probably is the answer to that. Tuesday, Australian rate decision, Japanese consumer confidence. 10-year auction in Japan. You've got Chinese holiday continuing, of course, Spanish unemployment, UK construction. The key thing on Friday for sure will be Fed Chair Powell speaks. And so that's the— I mean, obviously we had a Fed rate hike last week. Obviously we had a press conference as well where Powell certainly mapped out another rate hike coming in December. So what more he can add to the story, I'm not sure. But still, certainly that'll be a key focal point on Tuesday. Into Wednesday, and it's all about services PMIs on Wednesday coming out of Europe, and then these— the ISM non-manufacturing data coming out of the US, weekly oil inventories. Powell will be talking again on Wednesday, but it will be the Tuesday speech that will get the headlines. Um, on Thursday, um, yeah, probably the quietest, least interesting day of the week, Thursday, um, with just factory orders. Um, yeah, actually, so Thursday is looking a little less interesting. You've got some 10-year auctions coming out of the UK, Spain, and France though. And then Friday we finish off with a bumper set of numbers: German factory orders, German PPI data, you get the UK Halifax HPI, you get the, of course, the labor market report coming from the US, which will be the main focal point. You got the Conservative Party conference right the way throughout this week as well. So certainly lots to get our teeth into. But as it stands right now, we've got a positive start on the equity front when you're looking at the US as the S&P punches up to make its highest In fact, there's only been 2 days in history where the S&P has traded higher than where it is right now, and that is on the 20th and the 21st of September. So as I said, 2947, all-time high. DAX just pegging back a little bit here as I'm speaking. Oil's on a tear. Look out for that move to $75 for WTI crude and keep your eye on anything Italian by way of Italian yields. With their Italian bond yields, you know. And perhaps I'll finish with that chart. Actually, I'm going to finish with the Italian bond yield chart because anything above 3.24% is something you need to be mindful of. Anything above 3.24%, that's the highest reading this year. And if I go back, um, how far can I go back here? That'll be the highest readings we've had since the eurozone debt crisis So really, that'll be the highest reading since, since kind of 2014 time. So anything above 3.24% on Italian yields will just take that risk to, you know, ratchet it up another level. And as you've seen on Friday, that is a Europe thing. You know, European financials— I mean, Deutsche Bank down 5% on Friday as a result of that Italian risk. So it's certainly contagion. All right, that's it. Enjoy, enjoy the day, enjoy the quarter as we kick off the final quarter of 2018. Thanks very much.