Morning Briefing - 21st September 2018

Okay, happy Friday, 21st of September. Let's get a briefing underway. Usual, I guess, routine. I'm going to talk about the news and a couple of thoughts about some things to be aware of for the trading session ahead, and then I'll let my, my colleague and associate Sam North come on and he's going to look at the, the market from a more technical and trading setup point of view. First things first though, Got a look at the US equity market, and I was looking back to where we were obviously right at the beginning of the week. You'll remember, I think I did the briefing on the first day, and it was when we were digesting that latest announcement. Donald Trump kind of pulling the trigger, those new $200 billion worth of tariffs on China coming in in about 3 days actually, and then the threat of then ratcheting up the percentage from 10% to 25%, and the threat then of what China might do in retaliation. The market was dropping at that point, but then actually when you came in that morning and you kind of started reading through the details, it's not like Trump has not warned that this is what he was going to do. In addition to that, the fact that he was, you know, removing quite, quite blatantly a number of key companies like Apple, for example, which was one of the biggest casualties on that downtick in the equity market. You know, when it became clear that people like them were exempt from this, it wouldn't be impacting them, you know, they bounced and the market's just rallied ever since. And, you know, I think really the bigger picture here is that the US economy from an economic point of view is performing Well, and the biggest threat to this, obviously the largest tail risk or downside risk, is that of the trade war situation just blowing up. And that's not the case at this point. And as we've discussed yesterday about, you know, is this just a case of as long as China remains relatively tame and controlled in their response, which I think that that will remain the case because they know that come midterms it might be a a different composition in terms of the Republican control on, on the White House and Capitol Hill, then, you know, there's no reason to be too risk-averse. And equity markets have just continued to rally ever since. And, you know, this is the S&P 500. We've obviously broken that earlier kind of early— what would have been late August high. And, and here we are, this is record territory. Where do we go from here? Well, you know, as we've been saying in recent weeks, you know, now we're at these levels of which there is no historical precedence here to look at it from a technical perspective. You've got to think that we're going to get to 3,000 at some point in time. I don't see much to detract from that being the case still, what we've been saying in, as I say, recent weeks. The Dow, you know, we were looking at the Dow last week And we were talking about this technical breach of that, that late August high, which would have corresponded with the all-time high in the S&P. The Dow had a little more, you know, work to do to get up there. I think that was about a 10% or 2% increment change and we've broken it. So here we are now. We broke that yesterday. We've come back to find pretty much a support and then a bounce off that to push higher again off that previous all-time high that we saw. In late January, the beginning of the year, before the, the kind of inflation-fear spike lower that we had. So record territory, S&P, Dow, NASDAQ a little bit of a laggard at this point, just given some of the, the movements we've seen in that space in recent weeks. But again, it has broken above that mid-Sept high, which would have been last week or so. And so, you know, upside it's well within range that we could get there relatively soon. So equity markets still remaining buoyant irrespective of this kind of looming threat of trade wars ever present. Looking elsewhere then, this morning you've had a couple of data points and we've had the likes of this. This is the German manufacturing PMI, a little bit of a disappointment. We've had the euro come off a little bit since the data came out. This being then not shocking because the actual manufacturing PMI has been decreasing quite consistently over time. But obviously, if we look at a 5-year, you know, this is the lowest readings now that we're printing since really going back to the middle of 2016. So these are relatively low prints on that measure. On the service sector, the opposite is occurring in Germany. And actually, that's the second highest reading that we've had in 12 months here, going all the way back to right at the beginning of the year. For the French data, the manufacturing PMI was a little bit soft. The service number also a touch weaker than expected. So a little bit weak on the European data side. And just as we're speaking, the euro looking a little bit heavy and just looking to threaten down at the kind of range low from this morning. So worth just keeping an eye on that as I'm delivering this briefing. Okay. Going to talk more news then. Rather than the charts. I'll let Sam do that in more detail. But one thing you can see here is in the center, cable's under some pressure, and cable is in that respect underperforming. So there's weakness present in the pound. We're back below pivot. We're also below that low point that was seen, uh, what would have been yesterday late afternoon UK time. The Salzburg meeting— this was the big one that the market was looking for For the FX traders, I was kind of chuckling a little bit when I saw the photos yesterday. You've got like these, these old gray men in their dark suits, and Theresa May's there with her blazing red jacket on. You couldn't stick out, you know, if even if you tried harder than what she did yesterday. And after what had been what looked like positive developments from both sides, the UK government under May and that of the European leaders going into this summit. There were high hopes, and basically that's been shot to pieces, is where we're at at the moment. So let me give you a brief overview of some of the main comments. Donald Tusk, the European Council president, he's basically said there are positive elements in the Czechoslovakian proposal But the suggested framework for economic cooperation will not work, not least because it risks undermining the single market. The EU argues the Chequers poses a threat to the single market since it would give the UK access to the single market for goods while cutting back on other basic EU principles such as the free movement of people. Mr Tusk also ramping up the pressure by announcing that the moment of truth in Brexit talks would come at a Brussels summit on October 18th, by which point he wanted to see a breakthrough on the question of the Irish border. So again, that remains the key sticking point. In October, he said, "We expect a maximum progress and results in Brexit talks." Only if progress were to be made would he convene another summit in mid-November to finalize the deal. Now, from Theresa May's point of view, Which actually, reading all the comments that came out, you know, I don't want to be too conspiracy theory about this, but I just wonder whether there's been an under-the-table deal here where May and the European officials have gone, let's just, you know, let's just pretend we've all thrown our toys out the pram. You then come out, you then come out and say, as she has done, that we're ready to leave the EU without an agreement, and then you send out your senior cabinet to say, "We will have a no deal, no problem, if Europe want to play hardball." Don't forget, the Conservative Party conference is in 2 weeks' time. So it's absolutely critical that she manages this growing rebellion within her own party about a no deal situation. So, you know, is this a bit of a play because Europe have already committed, don't forget, to guess what, a meeting right after the Conservative Party conference. So I just wonder whether Europe know full well they'd rather deal with May than with others, i.e., Jacob Rees-Mogg-led crew. And so is this just a little bit of, you know, intelligent posturing to then achieve something in a few weeks' time, and all of a sudden the Chequers deal becomes something that they can agree upon? With some amendments. Again, I don't want to speculate too much, but just given the way that they were so positive and now how this has happened, you know, I just wonder whether or not this is just giving May actually a bit of a gift going into what would have been an incredibly difficult party conference. But now she can say, and she has done in the news this morning, that she's ready to lead Britain out of the EU without an agreement. And she wasn't saying that, not to that, that kind of commitment just a week or two ago. Mrs. May also said she would bring forward new proposals to resolve the Irish backstop question. These are likely to include an acceptance of the need for regulatory checks but not customs inspections on trade between mainland Britain and Northern Ireland. So obviously the Northern Ireland issue is the one she has to appease the European officials or at least get them to agree to. So other headlines along this line, and it's kind of fitting of what I've said, you know, this is just another person, the Transport Secretary Chris Grayling, telling the BBC this morning, Britain will leave the EU without a deal unless the bloc's leaders soften their position on the Irish border. For me, this is all a coordinated attempt by Theresa May to, to deal and tackle more effectively in that party conference. I would be expecting her, those then, to make concessions, as too will Europe, then to get more progress made come that October meeting, and then leading into then the November one, which is key. So this is the timeline. So when it comes to a more concrete framework of a deal and what it's going to look like, I think we've realistically got to look to November for that to take place. Obviously there's some real key things that are happening this weekend. The Labour Party conference commences, then you have the Tory Party conference. This is the 18th, 19th, well, October, the Brussels one. So that will be key then of where we start to see potentially some movement on both sides to try and get together towards a deal, which when they construct all the details is likely to be November. Uh, so there's a lot to get through here. Um, although we've had a lot of quite interesting economic data points— retail sales was very strong yesterday, but I would say again warm weather helping that out to some extent in terms of this sector breakdown of the specifics that was supporting that figure. And again, that's not sustainable in the long term. Inflation as well, I think, can be somewhat discounted as well in a similar sense on the category breakdown of where that came from. So economics, I don't think, is, is to be monitored, but I think it's the politics still that's going to be the driving influential force for the pound, no doubt, for the time being. Okay, final thing I wanted to talk about before I hand over to Sam, and it's this graphic here, because a lot of the new traders might not be aware of this. But for someone like Will, for example, it's one of his favorite days of the quarter and of the year because it's quadruple witching. So what is quadruple witching? And the reason why I say it's a favorite day of Will's, because as he knows, is that that increases market volatility in the equity market, and he's an activist by default, so he likes that type of market movement. Now, what is quadruple witching? Well, it's when futures and options the index and the individual stocks expire. So everything happens at exactly the same point in time, and, and typically what this leads to then is a big pickup in, in market volume. To give you an idea, if we look at here, this is the S&P 500 Composite Volume Index, the bottom, the blue line here. Now, as you can see then, quadruple witching is each one of these spikes which has the red circle on it. The last one we had was in June. And to give you an idea, the S&P 500 trading volumes surged 75% on that one day. So this is very normal, uh, that these happen as people are moving out, or like, and then into corresponding new positions. What makes today though so interesting is that we are about to see the largest revision to the global industry classification standard since 1999. Now this, you know, Bloomberg are trying to talk it up and sensationalize it, but look, this is a once in a 20-year event that's happening. In addition, it just so happens to quadruple witching. So what is this, this thing that they're referring to, this GIC standard classification change? Basically what it is, is if you think about decomposition of the S&P 500. It is now predominantly becoming ever more so a technology-led index, which means then that the index is, is changing quite substantially, which has ramifications if you're a portfolio or fund manager. So what's happening here is the index overseer, which is Standard Poor's Global, will merge some internet and media stocks with phone companies to form a new group called communication services. It's going to happen after the close. This means companies like Alphabet or Google, Facebook, Netflix will be out of their respective subsectors, forcing investors who track indexes based on classification to then have to shuffle money accordingly. To give you an idea as to what type of, type of size this could be in terms of nominal value, UBS have said the moves could force about $70 billion worth of trades today. Purely on the basis of the recomposition, if you like, of moving cash in and out of different holdings. So definitely got to be aware of this today. Um, I wouldn't read too much into this. Certainly isn't tied to, say, macro changes in that respect. This is all to do with the mechanics and how markets work and how portfolio managers operate. And so what we're looking at here then is volatility tends to go up when fund managers try to adjust positions using new derivatives. So absolutely, you've got to look out for this going forward. Okay, so a few people in the chat saying there's some issue with the feed freezing. I'm recording this, so hopefully that's still happening. So I'm going to continue. That's my part over, though. So I'm just going to grab Sam. He's going to come on. He's going to look at the charts. My bottom line here, though, for this quadruple witching, in addition to this classification change in the index, all I'm saying is it's going to be kicking off when the US come in and you just need to be mindful of some quite erratic type price movement. It's not about the market going up or down. It's just about an increase in movement and volatility. So just need to be particularly careful when navigating through the session this afternoon. Okay, hand you over to Sam. Have a good day, guys, and a good weekend.

Hi guys, yeah, definitely one to keep an eye on later on. Actually, just seeing the Bund, see, not nothing to do with that, but just pushing to a new high, breaking through the sort of the range that we had over the last sort of couple of hours. Really key level from back on the beginning of the week. Then we found resistance there on the, on the Wednesday, bit yesterday, and broken through. So I want to keep an eye on there as, uh, the Bund just pushing a bit higher. Cable, as Ant mentioned, uh, on that pivot earlier, we had a few tests of that, that level, uh, this morning. If we just drop the time frame down once, twice, three times, the classic on the return to the pivot, and now on the low of the day, quite a good opportunity for those that had got in. In terms of where we could go to, we've broken through also quite a key— or we're trying to break through now— quite a key level from back on Wednesday. So the negative sentiment returning this morning, all the front page of the papers obviously going with the negative side of the story from these meetings. I would short-term look for for, uh, this market actually to come down. Although, albeit, I do believe in the next sort of coming weeks we will continue this sort of pattern of waving higher. So elsewhere, Euro, quite a key point of interest around that pivot. We, on the longer term chart, you can see we had a decent break above those key resistance points and that 118 level. I think if we can get down to the pivot, it would be a a nice place to, to get in for a long. And even failing that, really, you've got quite strong levels from the beginning of the weekend and Friday last week as well. So strong resistance points around there. Dollar just recovering a touch this morning, but still below 94 quite, quite convincingly. I mean, look over at gold, which has pushed higher this morning, sort of failed push above that R1, which in be quite a telling sign, uh, for gold. And we're just coming back down to test that lower part of that trend from this morning. So we're keeping an eye if we can get a breakthrough of this area. And if the dollar continues to sort of strengthen to its highest point of the day, it might see a further push down. And along with EUR/USD, we get a test of the pivot here in gold, which also looks quite an interesting point to get in. Worth, I would say, having a couple of these trends on. So quite a key point, that sort of low of the morning there, 3 AM, 12:12 on the futures, that I'll be keeping an eye on. Equities, uh, yes, afternoon volatility to pick up, but I think, you know, you've got to just favor the upside really, unless there's stories or cash open that sort of signal otherwise. But even then, you know, maybe just a case of waiting for, um, the storm to calm down before before getting into that trade as well, to sort of continue up to all-time highs again. It's crazy, but just the way it is at the moment. Dow Jones obviously making that new all-time high again this morning and on the highest level we've seen. And how long till Donald Trump tweets about the Dow, if he hasn't already? And, you know, soon 27,000, you know, absolutely can expect to tweet at about that. Dollar-yen just coming down to that pivot, uh, or the R1 if you're, if you're looking at it. Um, quite a key point just below as well. So any further move here lower, um, I would want this point to go. And even then, you know, I, I think you've got to be targeting the high of yesterday, which we broke through very early this morning. So quite key support levels just where we're trading now and also a bit below. to sort of determine whether we can push on or not. Aussie dollar, which is along with the dollar pairs, continue to sort of push high. I think it's always a tricky one on Friday. Obviously you can have a bit of profit taking when you've had a move such as this in, in the dollar. I think, you know, while I do favor upside for the currency pairs short term, I believe it just to be a blip before, you know, the dollar does strengthen again into the back end of the year. But it may well be from Wednesday, of course, next, next week with the Fed. But in terms of trades today, the pivot level quite key for a couple of pairs, and gold as well. For Aussie dollar also the case with that low of the day on that, that point. I quite like the look of that as an interesting point, uh, something to just sort of be aware of, uh, perhaps later on in the day. Oil, uh, just to sort of wrap things up, you can see just testing that pivot now where we had quite a lot of price action yesterday. The first test already has held, so we're keeping an eye on how we get on here. Obviously the previous high of the day this morning— I mean, you'd have to have been in the market just before 7:00, but really nice trade where we broke through to then find support. We're keeping an eye on this pivot. Failed push above here again might be the key to get in short, but it's another one where you you know, on the, on the daily chart, it does look quite bullish still, uh, having broken through some sort of shorter-term resistance points over the last couple of days. Dollar-yen just coming back down actually to that level I've got marked up, so I'll be keeping an eye on this. Uh, if we can get a breakthrough, you might get a, a further follow-through. Um, later throughout the day, I'll come on and have a look at the charts more longer term, where we sort of stand going into end of the week. And then obviously next week being the last week of the quarter, um, along with the Fed, I would expect it to be quite a decent one to trade. Any questions, as usual, please do get them in the chat. Um, and if not, I hope you all have a great weekend if I don't speak to you guys.