Morning Briefing - 21st August 2018

Good morning, it's Tuesday, 21st of August. I hope everyone is well. And just getting straight into the thick of things, looking at the charts this morning, uh, some moderate risk on observed. And we've got equity index futures, uh, marginally positive territory, albeit for the time being. Uh, the S&P, we're gonna have a look at in a second, obviously from a longer time frame, testing up with some key levels. Which could open up another assault on the all-time highs not too far above. But the key predominant theme of the morning has been that of some dollar weakness seen late yesterday. We're going to discuss then in a bit more detail the reasons behind that, really twofold, but both coming from one man, Donald Trump. And so with that in mind, we've had both currency pairs. You can see EUR/USD and Cable top left have moved higher. Both up an equal amount, so definitely reflecting that of dollar movement rather than specifically that of— on the fundamental side at least— of European or UK dynamics. And then really gold reflective of what has been a bit of a breakdown from a classic— oh, there goes my camera, one second. Okay, it's okay, I'm safe and sound, it's fine. Thank you for your concern, Sam. Um, but yeah, just as I was saying, what we have seen is a bit of a breakdown from the normal, uh, kind of inverse— well, I should say not inverse, but the flight to quality bid you typically see in gold. Because if anything, with the escalation of Turkish situation and with the China trade war situation If anything, gold's been moving consistently lower. What we have seen is now with the dollar weakness that was observed overnight, a bit of a bounce back, and we've managed to reclaim the 1,200 handle, at least for the time being. We found a bit of a floor around the respective R1 level, which is pretty much right on that psychological level. Elsewhere then, in Bunds down about 20 ticks, the US 10-year down about 1.5. So relatively flat but slight negative, suggesting fitting with that kind of moderate risk-on kind of atmosphere. So let's get straight down to the, the news, and then we'll look at some of the associated charts and levels. But this is what everyone's talking about: the dollar extending drop on Trump remarks. And so twofold here, so just looking at the two major stories in the headlines, this is the first one: President Trump has accused China and the European Union of manipulating their currencies. Obviously, this is the long-running debate with the US's largest trade partners. Essentially, he had a gathering and Reuters had reportedly picked up some comments that he said to a private gathering that, I think China's manipulating their currency, absolutely, and I think the euro is being manipulated also. He presented this accusation without explanation or substance, according to reports, and obviously conflicts with the findings of his own administration such a short time ago. So if you remember, one of the positive catalysts that's been in play the last couple of days has been the fact that after hitting a bit of a an impasse between talks, China and the US. It looked positive that the two were going to be coming back to the negotiating table again. Dialogue was to recommence, which is a positive. But Trump being Trump, and this is going to fit into a little bit of my view about what I think about this, which is I do think this is purely, uh, tactical from Donald. And if previous negotiations, any type of precedence, this absolutely fits that, that pattern that he typically follows. I.e., the olive branch comes out, he brings them back to the table, but then he reframes the situation and takes back control and becomes the aggressor thereafter. So although you have a knee-jerk reaction to it, I'm not sure whether this is just you know, his typical political jousting rather than something more concrete on the threats side of things. The other big thing, of course, that we've had, and probably the one that's drawing more attention, is this one. Because late yesterday, Trump complained to donors in the Hamptons about Powell's rate hikes. So anyone who remembers the, the transition between Janet Yellen and Jerome Powell, there was a big question mark on whether or not Trump— Trump seemed to go through a bit of a love-hate relationship with Yellen. They were getting on fine, then he didn't like her, and then right at the end when she delivered in her cautious rate hiking cycle all-time highs in the equity market, it was, it was love again at that point. Now the problem you're having with Powell from Mr. Trump's perspective is we've now had 7 interest rate hikes, uh, 2 obviously this year and 2 under Powell and 2 more to come is the schedule. And this is leading to Trump criticizing that of, of Jerome Powell. He said he expected Powell to be a cheap money Fed chairman, but obviously the opposite is happening. And again, this is him talking at a private fundraiser. Where else could Donald possibly host that but the Hamptons, of course, being the people's president. And the Federal Reserve, obviously, as we know, has hiked multiple times. And the articles on Bloomberg talking about how the Federal Reserve and the government are supposed to be acting independently. Of course, you know, we The British public loves to wade in and criticise Mark Carney for politicising Brexit, as the papers would say, but absolutely fine Donald Trump can criticise the Federal Reserve, of course. So how will Powell respond to this? Well, let's just get things straight here. Jerome Powell is absolutely understanding of his importance and his ramification of his tone and words has on financial markets and pricing. And so therefore, do not expect Powell to be firing back at Trump. Totally not his style, totally not the style of a central bank as mature as the Federal Reserve. Definitely not going to respond, if you like, or be teased in that way by, by the president. So Think of it this way, and this kind of fits into then why I think both these issues are a little bit of hot air, is because if you're Donald Trump, you've got the midterms coming up in only a few months' time, and you are pushing for— what else could be better than hitting record all-time highs in the stock market? This in combination, don't forget, with near record-low unemployment, of course, for the United States of America. So here we are, this is the S&P 500, and the key levels I'm looking at on the upside are here. So really some of the near-term price action that we've had, we're finding a little bit of resistance there at the moment, but a breach of that certainly starts to open up then a test and run-up of the earlier August highs. Start looking on a much longer time frame, then you can see a break of these levels where we are here brings into context the all-time high 2018, just short then of that 2900 mark. Absolutely, Trump will be doing his all to see that happen in the near future so he can basically talk up his political book. What better than saying to Joe Public of the job that he's done through the administration's policies and what he's been saying. Not only that, talking of Trump and his ability to feed the kind of political narrative, obviously he is looking to impart renewed sanctions on Iran. So if you think about it, he's also protecting America. He's speaking out, being forceful, taking action in the Middle East, but obviously taking harsh sanctions on Iran could impede their ability to produce crude, and that's going to force the price of oil higher, or risk of that materializing. So as such, that's going to be very negative for consumers in the US who've been paying close to multiple year highs for the price of gasoline at the pump. So in order to counteract this, Donald Trump has now given the go-ahead. The US government is going to basically tap the SPR, the Strategic Reserve. So the US Department of Energy is offering 11 million barrels of crude for sale from the nation's Strategic Petroleum Reserve ahead of the sanctions on Iran, which of course are expected to reduce global supplies of crude. So again, all of this in fitting them with Trump just looking to, I think, position himself accordingly for the, for the months ahead. One thing that was quite interesting was a tweet here. This is an infographic mapping the Fed interest rate cycle. So there's been 7 in total. So there's your incremental kind of staircase kind of fashion on the blue line. And then overlaid with this, it's annotated with each of the Trump tweets about what he thinks about the Federal Reserve. And as you can see, as the interest rates are getting ever higher, the frequency of his tweeting about his criticism of Jerome Powell is also picking up pace. And for me, I just think although this definitely has moved the market this morning. I know, I just think, what else are you expecting from Donald Trump at this point? Now, that's not to say I do think that US equities are going to hit record highs. It's just a matter of when, whether it'll be this week or next. It's gonna happen, I'm afraid, irrespective of these emerging market risks or trade talk risks. I do think that he, he will manage it in a way. And if he can start shaping perspective about putting pressure on the Fed to not tighten too quickly— not that I think, of course, that the Fed will listen to him— but undoubtedly when we hear from Jackson Hole Symposium on Thursday and Friday, one of the key things obviously that all market participants are going to be looking for is what is the Fed's perception about external headwinds, i.e., this development in Turkey, potential for contagion for an EM flare-up, if you like, and then also the impact of the trade war situation if it were to worsen on not just the US economy but the global. Now, for the first point, I think that's probably the more pressing because this is a totally new thing that the Fed are going to have to look at. Turkey has always been there, but never to this type of degree of concern. Certainly not the flare-up we've had in the last 2 weeks. On the trade side, I don't think it's materially moved enough, i.e., in a negative fashion, to alter the Fed's thinking. So it's really the EM stuff I think I'm going to be more interested in. So just having a look then, I mean, the dollar here has forced the price of the currency pairs higher, as I've said. Um, we were just looking at the EURUSD chart this morning. We hit pretty nice technical level, which was that previous point of support on the 6th, the resistance seen on the 9th, 10th. We got right up there with a quick test. That was some of the response to the commentary last night, the Asian reaction, the extension of dollar weakness. And we got right up to a tick of hitting that level before a bit of a pullback has been seen. So good level of resistance there on the upside to look at in the intraday. Did offer any of those people in particularly early some opportunity at a short, if you are of that belief that really the market will get over pretty quickly and see through Trump's kind of agenda here. The other thing that looks quite interesting is, if you remember, there was quite a nice trendline that got broke. Catalyst being in cable, predominantly the Trade Secretary comments where he talked about the prospects of a no deal have increased, i.e., 60/40, and cable broke lower. Well, cable's been recovering, and this dollar weakness has certainly helped that. And we've come right up back to that same trendline for a test on this morning. This is looking at a daily continuation, so definitely also cables up at quite an interesting point here, these, these highs that have been seen. So some currency levels to, to definitely just be mindful of. Um, one other thing we've had overnight, just to round off the news side of things, was the RBA, Reserve Bank of Australia, minutes. They've sketched out a scenario where faster growth, global growth, and US stimulus withdrawal push the Aussie dollar lower and underpin a stronger outlook down under. Reiterates no strong case for near-term policy adjustments though. And so Aussie, just looking at this morning, a little bit positive, as is the CAD. Does come though, some of these commodity currencies with gold having a bit of a bounce. Given some of the dollar weakness, if anything, likely then just helping those other counterparts. So other just basically pairs being assisted by the dollar weakness more than maybe some of the direct commentary from the RBA. Okay, quick look at the calendar, and today overall is relatively quiet. 9:30, you do get some public finance data coming out of, um, the UK, but ultimately unlikely to be particularly market-moving, if at all. Going forward, pretty quiet otherwise for the morning, and then going into the afternoon, likewise, we'll look out for the API crude oil inventory numbers later on into the evening. So given this distinct lack of real credible things occurring on a scheduled basis during the session, obviously it's going to be more about market sentiment influenced by some of the latest commentary on the trade war side, the criticism of the Federal Reserve, and how the market wants to take that from a sentiment point of view. Arguably, when the US come in, it could be quite interesting to see then whether you get a bit of a second phase to moves, just given the fact that the commentary became— and the various articles— quite late last night. All right, I'm going to leave it at that. I'm sure if there's any other good charts, Sam will pop them in the chat in due course. If any questions, do just let us know. All right, have a good day. Thank you very much.