Morning Briefing - 22nd August 2018

Okay, very good morning, Wednesday, 22nd of August. So I hope everyone is well. And quick 20-minute kind of recap of where we are with things— excuse me— and what to expect from the day ahead. And a fairly tepid open after what was a decent run-up in US equity markets yesterday. So you just first and foremost bring up the S&P 500, and here we are. We were kind of talking about this both Sam and I at the beginning of the week. You had that test up at the early August highs, and there was almost— it felt like no other reason, if just behavioral, for us to have at least a little push and a flirt with the all-time high, which was up at the, uh, the kind of 2018 peak at the beginning of the year. Got very close to that before then, uh, just pulling back down. And we're going to have a look at— there's been obviously some quite headline, far-reaching news flow if you can believe it, about Donald Trump. All kinds of things materializing in reference to his pre-campaign behavior and some of the investigations that have been ongoing going back to 2016. So we'll have a look at that in a second. But otherwise, the move on the pullback on the equity space, probably more a bit of a byproduct of just some of the steam running out as we got up to those elevated levels. in combination maybe with some of these, these Trump headlines. But elsewhere in the currency market, the dollar is pretty flat overall, but it is just, if anything, consolidating after a pretty aggressive pullback more recently. And consequently, both pairs are holding on to some of the gains that were seen late yesterday afternoon. So there was a degree of bit of dollar weakness, uh, last night. This would have been kind of during the late part of US trading hours and overnight in Asia. We've just kind of gone sideways ever since, but cable's managed to reclaim the 1.29 handle. So just having a look on the daily chart, what was quite interesting here was again we were looking at this trend line from— well, this is kind of a multi-month going back to the end of May. This was when we were looking at the continuation or the persistent kind of decreasing of economic output of the UK in various different economic measures. At that point, the pound was weakening, and then we had the no deal comment from Liam Fox, the trade secretary. That, with the technical breach, resulted in quite a decent move lower, and then we've bounced. And what was quite interesting is we were hesitating back on the retest at that level And then subsequently, with some of the extension of dollar weakness last night, we managed to break a decent move above there. Now these lines actually on the chart aren't fresh ones I've put on, they're ones we've had on all week. And quite interestingly then, that previous point of support before the eventual break seen back on the 6th, 7th of August was the exact point of resistance on that rebound we've seen in the kind of overnight trade. Elsewhere then, with some of the dollar movement, the euro's also, as I said, been on the ascent and just confirming some of the price movement of late. And obviously this was such a key level we were looking at again back at the beginning of the week, and then we broke yesterday. And you can see how influential that level was as a point of resistance, having played its part through the month of August. The eventual break of that saw quite a wicked move higher, and we can see after we've broken the futures 1564.5, we shot all the way through 116 in pretty quick fashion. Had pulled off a little bit, probably a lot of the short-term fast money moves just booking profit on the spike coming out of some of that position. But inevitably, EURUSD still remaining fairly elevated and above pivot should probably be a line of support going forward for the for the session ahead. Elsewhere, oil is seen a little higher this morning, up about $0.43 above the pivot level. Yesterday's high coming in, this is around what we saw, a bit of a push higher through the traditional kind of pickup in volume on the old pit opening times around 2:00 our time. And moved up to around $66.50. So trading about 20 cents shy of that at the moment. So certainly above the Asia-Pac session, and so that would be an obvious target on the upside. Just highlighting as well the half-nine price action that we had from yesterday evening, of course. So this was the release of the API crude oil inventory numbers. So just having a quick look at the numbers, so you're fully armed and we'll go over this closer towards the afternoon's release of the DOE's API. We had a drawdown last night of 5.17 million. So quite a substantially larger drawdown than the expectations of 2 million. Cushing was a build of 195,000, but markets were expecting a bigger build. Gasoline was a draw larger than expected. Distillates was a build of 1.8 million. So on the balance here, bullish data, and consequently, as you saw on the crude oil chart, prices moved higher in response to that. Uh, sideline, you often see this actually with the way that the oil market tends to respond to the inventory numbers if they are outlying enough that the market moves. Asia, very little appetite to really trade oil overnight in general or react to the information at hand, but what you do tend to see if the numbers are as I said, outlying enough, is not only a move at half 9, but when the early birds come in, if you like, at the part of the UK-European entrance, you do sometimes get a secondary kind of phased move as the— as they kind of interpret the information that came out last night. So possibly just edging up. If we get an extension of dollar weakness, then certainly you might just grind up towards yesterday's high. But obviously everyone's going to be waiting for this afternoon for the— for the DoEs. On that point, I did want to quickly look at this as a slightly longer time frame. So this is looking at 60-minute candlesticks, and the two rectangles I've got here marked up are the price movements on the last two DOE releases. As you can see, some of the largest price action has come on the day of those releases. And what was very interesting was, I think last week was one of the one of those rare occasions when you get a multivariable release that all points in a fairly unilateral direction. By that I mean it being a bearish report, and consequently does make life a little easier when trying to pick through the noise and to be able to trade that type of event. The thing that was interesting about the week prior to that, which actually was an even bigger fall, was that the actual decline in oil prices occurred roughly about 52 minutes after the real numbers came out. So it really took a bit of time for it to bake in, which for the newer traders certainly was a good lesson of, I guess, not having a fear of missing out, because the move didn't really materialize until really an hour later, and the move actually continued for several hours thereafter. Now what we've had, obviously, as just discussed, is the opposite last night. Just to put things in a little bit of a perspective, bullish data and the price moved up. So we're looking at that little rectangle there on the far right-hand side to, to have a look at where we are and where we have been. So obviously yesterday's high comes in just above here, and then above here you're probably looking up at around the R— well, another area of interest, 6676 in the futures. Kind of got these points here, previous price action. And in the 67 handle, which just above is the R2, which encapsulates some of the previous highs going back, um, to the kind of 9th, 10th of August, and then the prevailing high thereafter on the 14th printed up at 67.72. So a couple things to just keep an eye on. We'll obviously go through this a lot more to the time of the release. All right, let's have a look at the news. There's obviously one big headline that all the media agencies are talking about this morning. So let me just switch over my screens, find the right one. Here we go. Headline: Trump's terrible day sees Cohen plead guilty, Manafort convicted. So a couple things here, certainly for the interns, I know you'll be going, who are these people? I don't really recognize them. Well, Trump's former lawyer is Michael Cohen, pleaded guilty to illegal campaign finance charges. Over hush money paid to— you can't make this stuff up— hush money paid to a porno star and a former Playboy model. Certainly has his type. He went all the way but naming Trump, but pretty much saying that he was— the president had ordered him to do so. Not only that, pretty much simultaneously, separately in a Manhattan courtroom, the president's former campaign chairman Paul Manafort was convicted of 8 counts of tax and bank fraud charges. This all going, uh, alongside then this special counsel Robert Mueller's investigation about the pre-election activity that happened in 2016. So this is big front page media story, but you know what I want certainly the newer guys and the interns to be aware of here is The press love these type of headlines. You know, whether he paid, paid off a porn actress or a Playboy model, it's like, who cares that they're a porn actress or Playboy model? It's just sensationalist journalism that makes people interested and makes for a good headline. Look at the charts this morning, and I think that really tells you something much more interesting. You know, if people are— and obviously the Democrats are gonna cry for impeachment and so on. But let the market be your guide. And most of the talking heads, fund managers we've been listening to this morning on Bloomberg, and I kind of share the same opinion, is that this is just a road bump for Trump, of which he has hurdled several since his presidency. This is just another one. If you think about it, what tends to happen— look at this, this objectively and forget Trump— what tends to happen ahead of any big political event. Obviously, we have the midterms occurring in the beginning of November, and ultimately this isn't just the US, this is global politics. You start to get the unearthing of skeletons, a lot of mudslinging of various different leaks and sources, reports. This is absolutely usual business for, for Western politics ahead of a big thing like midterms we've got coming. So I think that you're likely to see this type of headlines intensify for Trump. He's managed to avoid any kind of penalty so far, and I think that this will just continue to be the same. I do think from a financial markets point of view, there's much more bigger concerns like trade wars ultimately number one, and then secondary tail risks to the emerging market crisis that's been developing over the last couple of weeks. So yes, big headlines. Do I think Trump's going to get impeached? Absolutely not, is my opinion. Just so the interns are aware though, has a US president ever been impeached? So you guys tell me, any answers in the chat room? Can you name, or is there any president who has been previously been impeached? Answers in the chat room. I'll give you 30 seconds. See who you can come up with. Okay, just while I'm waiting for some of the answers to come in, um, one of the other key things we're going to look at today is going to be the FOMC minutes. So once I review— let's see some of your answers come in, and then I'll have a look at some thoughts for the minutes for later. But just currency pairs A little bit of a pullback here for the dollar, i.e., coming off its depressed levels from yesterday. So subsequently, both those major pairs just coming under a little bit of pressure in cable, euro-dollar as we speak. Okay, so a couple of people have put in some questions. Okay, Fabian, Fabian Good. Nixon resigned before he could be impeached is correct. Bill Clinton Was impeached? Absolutely. If you remember the Monica Lewinsky scandal, "I did not have sexual relations with that woman," where he obviously did. So one of the key things though here, and let me just talk you through something, as this was something when Trump first became president was a big talking point. A lot of people thought there's no way he'll last as the president and he'll be impeached. and lots of Democratic Party members were pushing for this to take place with all the scandals that started to unfold. But what is an impeachment? So just a quick snapshot, 30 seconds. Impeachment is a process by which a standing US official is formally charged. But they've got to be charged under different categories: treason, bribery, high crimes or misdemeanors, which bring into question basically the US and its Constitution. Now, how does it work? The process begins with U.S. Congress voting to impeach, which they may be encouraged to do so by regular voters. So it's not just the politicians, it needs to be a public sentiment for this to happen, of which on balance you probably say there isn't that in America at this present point regarding Trump. If Congress passes the motion by majority, it will appoint members to act as prosecutors to the subsequent Senate process. Now, does impeachment remove a president from office? Only if found guilty by two-thirds majority of the Senate. Now, one of the things here about Bill Clinton is that he never actually got fully impeached because it was a split in the two chambers of Congress. One did, one didn't, I believe was the case, see him as guilty. Now, with Nixon, who ultimately— the Watergate scandal was the worst of the bunch— he actually resigned before they could even make a vote. And Andrew Johnson, as some of you have said, was the, the other person. So this process particularly difficult, of course, because for Donald Trump to be impeached, he needs the Senate and his Congress— don't forget, this is completely Republican-controlled— to all go against and turn on their own president. So it's seen as highly unlikely at that point. All right, final bit of news to have a look at. And this is something for this evening. We are of course awaiting the FOMC minutes. Now the point I just want to make about the minutes this evening is just the— that don't forget these are the minutes of a meeting that happened 22 days ago. Think about the market sentiment and the current narrative that was driving market direction 22 days ago. Then think about when did this Turkish situation and emerging market concern erupt, and certainly that latter point fits within this window after the actual policy meeting that took place on the 31st of July, 1st of August. As such then, conditions have changed quite dramatically, I think, and I think market positioning is quite a bit different, which in all honesty, these minutes are now outdated and are fairly redundant. But I do think there is a slight prospect of the markets in at least a short-term movement of perceiving these minutes as slightly hawkish, purely on the basis that they're commenting on a situation that predates that of now a slightly worse global picture. So the, the way to tackle this, I guess, is just be mindful if we did see something like some dollar strength, a little bit of yield movement on the upside in the US, on the interpretation that, wow, this is actually, you know, pretty optimistic, quite confident, then I wouldn't expect those moves to last for too long because people will quite quickly put their profits on any of those moves and look to the bigger picture, which is the current day, which is quite starkly different. Now, this chart that I'm showing you here is quite interesting to really get a flavor of how things are changing. Point one is, remember what we were saying in the briefing yesterday, Donald Trump was heavily criticizing Jerome Powell for his multiple interest rate hikes and the more that he's to deliver this year. So as we were talking about yesterday, purely, I think, a political move from Trump. Powell insiders yesterday were quoted as saying, absolutely, they're not going to listen to Trump, which is absolutely what I'd expect the central bank to do. Trump can say what he wants, uh, he's got his own agenda to appear popular and that he's doing the right thing, and obviously that he wants a higher equity market and so on and so forth, but the Fed will do what the Fed have got to do. The interesting thing here is that the Fed are still on track by market pricing in short-term interest rate futures for 2 rate hikes this year, as they've communicated. There's still, still around approximate 60% pricing of a SEP/DEC hike, those months specifically, of course, because that's when we get the Summary of Economic Projections. The only thing that's changed here is the rate trajectory over time, and actually people are getting less confident about the rate hike sequence as we go into 2019. So that means then that going into 2019, we've seen a gradual drop-off over the last month in the prospects then of rates continuing to rise thereafter. So again, contingent really, and not so much the minutes but Fed commentary going forward. What's key is monitoring and tracking of the developments with the China US trade war, and then also does this Turkey thing develop into something more meaningful for the global economy to alter the Fed's kind of thinking. All right, quick look at the calendar and that will wrap things up for the morning. So let me flick over here. This morning is particularly quiet in terms of scheduled data, at least not until we get into the afternoon. Uh, any FX traders looking at the, the loonie CAD currency does and is particularly responsive to economic data— retail sales, CPI, GDP— that is coming out at 1:30. There's no major US 1:30 data, not until later. You get existing home sales, but this is largely going to be non-market moving, as is typical in this present context of US data for the housing market. But what always is market moving is going to be the DOE all inventories, regular time, 3:30. So we'll do a more thorough debrief of that closer to the time. Minutes, of course, from the Fed, not until 7 PM. I'm not expecting, in summary then, the minutes to be a game changer. I think we've moved on from where we were 3 weeks ago, so any move that does occur, if it occurs, I think would be particularly short-lived. And then elsewhere, the other key thing to just be aware of is that US-China trade talks in Washington are happening. And for me, this is a big deal. But think about Donald Trump and think about the type of media assault he is under when he wakes up this morning following the news that's happened with Cohen and Manafort. I would think, knowing what Trump's behavior is like, he's going to be more concerned about tweeting on these issues about a witch hunt and so on and so forth. But the bigger thing is, does he comment explicitly on anything? Is he aggressive going into the trade talks with China? That would be more of a concern for me and for markets, I believe. All right, I'm going to leave it at that. Let you guys get on. I'm sure Sam will share some charts of any decent technical setups that he's seen this morning. But any questions, just let us know. Otherwise, have a good day. Thanks, guys.