Morning Briefing - 23rd August 2018

Okay, very good morning. It is Thursday the 23rd of August. Hope everyone is well. What we're gonna do is kind of go through things in, in two sections, because one is we've had a historical marker from an equity markets point of view. We are now, as you would have seen with the close from yesterday, it's the US bull market has hit a record run And we're going to have a look at a few things that have changed over that period, and then we can look a little bit more detailed as to things like what was the reaction to the FOMC, what's happening in Australia, and why did their currency weaken quite significantly overnight. And then we can have a few thoughts about going forward on trade talks, Brexit. We're looking for a technical paper to be released on details from the Brexit Minister later, and we'll have a look at some of these other things. So Let's just jump straight in on some infographics here. This is kind of the headline that people are looking at. So it's been 3,453 days and $18 trillion later, the US bull market has hit a run. So here's quite a neat infographic that the FT have put together. This is looking all the way back to— well, this encapsulates here the Great Depression of the 1930s. And looking at the phenomenal story that, that of the US equity market. This is the S&P 500 in quarterly prices annotated by all the significant things that were happening, happening. Now each of these phases are defined here on the top by these areas. You can see this present, March 9th, 2009, to the present. So the point of which we hit the bottom post-Lehman Brothers filing for bankruptcy and then all the way up to where we, where we are today. It's now overtaken that of the 1990 to 2000 bull run. Now I thought this was particularly interesting. This is a picture of the largest companies in the S&P 500, and what you've seen here is significant changes in the, the, the composition of the type of company over the last 10 years. Certainly I remember when I started in the market, you know, I still remember people like Walmart were extraordinary large, Exxon, Microsoft, they were type of the biggest companies. I remember the guys who are a little bit older than me, so any of you guys in your 40s, you'll probably remember the big tech kind of or let's say a push towards the latest technology with people like Cisco and IBM would have been the cool places to work. IBM now in size is the 36th largest company in the S&P. It used to be top 10 only back in 2009. What has seen the most monumental shift, of course, as you guys will know, are the technology names. So, you know, check out the story of Amazon. It's just quite phenomenal, really. I mean, you're looking at— that's right at the bottom here, and it's surged all the way up to the number 2 spot. Of course, just one step behind that of Apple. Even Apple itself 10 years ago was nothing like to this size it is now, because if you remember, the inception of the iPhone was really the game changer for them going forward. So obviously tech has been a monumental driver of change in the composition of these these indices. But not only that, from a more recent historical point of view, you've had something which is even more important, and that is obviously an unprecedented era of central bank stimulus. Remember, the interest rate environment that we've had here on the right-hand side is historical, i.e., historic low interest rates. This is ZIRP, zero interest rate policies, hadn't existed before. And in the case of some, negative interest rates. And then, of course, you've got unconventional measures like quantitative easing, which were purely academic hypothetical proposals, which are now obviously fully embedded into the system. And then, obviously, the technological innovations that have taken place. And then the last things we've had, of course, are corporate tax cuts. Again, the last time we had this in the US to the degree that's taking place under the Trump administration you've got to go back to the Reagan era. So obviously a lot of things have been all coming together in order to have this kind of monetary and fiscal mix, technological advancements to help make this market move higher. But there are some other underlying interesting graphics here to quickly run over. Check out Netflix shares over the last 9 years. Um, I still remember— I don't know if you guys did the same— I still remember getting the Netflix DVDs. I would, I would po— I'd get a postal order of 5 DVDs of which I'd watch, then I'd have to repost back to Netflix. Ah, hindsight, a wonderful thing, hey? If I would have bought those shares then, I would have had a 6,000% return back in, uh, when they were created as a company. I think this was back in '99, uh, for them. But incredible story there in the way that they've risen. And obviously looking at all these kind of FAANG names— Facebook, Alphabet, Apple, Amazon, Netflix— comparative to the benchmark S&P, you can see this really sharp outperformance obviously that we've had. Um, one interesting thing though is this chart here which looks at the market cap of the S&P 500. So you can see over the 10 years it's increased quite exponentially. However, the number of shares outstanding has decreased. It's almost a perfect inverse relationship here going forward, meaning that there's less available shares. So as a consequence then, by net default, the value of the shares is higher. Now this is when we talk about, um, bond buybacks. You often hear this related to corporate earnings season. And what you've got here is that the market value of the S&P 500 To give you some— well, let's flick back to here— to give you some idea, it's up 312% from where we were in the bottom of this beginning of the bull run in March 9th, 2009. So that equates to about $18.4 trillion. But measured another way, the market is shrinking. As the FT says here, the number of shares in the S&P 500 has fallen just over 3%, a factor that, as some, creates a scarcity value that's added to these gains. Now if you scroll down, this is a look at the buyback pattern that we've had over the same timeline. So you can see here, 2009 going all the way up, so the full years what I'm looking at here, up to where we are at the moment. Obviously if you're going to do corporate tax cuts and you're looking to meaningfully repatriate US profits, which there's an extraordinarily large amount seen overseas, particularly for those tech names as you know, Well, then obviously this accentuates the capital and ability for these corporates to buy back shares, and as a consequence, the share price moves higher again. It's kind of almost self-fulfilling in that way. So, uh, by the numbers, uh, with buybacks helping, the S&P 500 companies report back-to-back quarters of nearly 25% earnings growth per share this year. Again, the buyback trend accelerated by the repatriation of US profits once held overseas. To avoid taxes. So not all obviously just a one-dimensional story. There are other mechanisms that are helping support the price rises that we've seen. But how effective has this bull run been? And I thought this was quite good to look at a layer of context. Um, this is looking at all of the S&P 500 bull runs by percentage return. And you can see the current run that we're in, although the longest, is by no means the most aggressive, because, uh, obviously when things fall dramatically, such as the Depression that we had late 1920s, early '30s, the recovery of that was incredibly sharp. And also the run that we had in the 1990 to 2000 era was actually more aggressive. Um, so the S&P closed up on Wednesday, now 323% higher from the start of the bull run, but that's against 417% of the gain in 1990 to 2000. Uh, the bull run that was seen in the early '30s was at 35.5% annualized over that period, so it was way stronger in that kind of time frame. So a couple of things to have a look at. Interesting report just on the FT, you know, just from a broader context for the interns. I think this is quite an important thing to look at, to know your history about these indices. So enough of that, let's get down to business and what's going on right now and what's relevant for the trading day ahead. One thing is what you probably get better at doing the more experience that you get is when you turn on your screens in the morning and you look at the charts. I think the charts, you know, picture paints a thousand words. And, and if you were thinking, okay, so what was the FOMC minutes? Well, if you look at the charts from 7 o'clock when the minutes came out, you can see that there's basically no movement in US equities, the Treasury market. You can see here in EUR/USD ever so slightly. A little blip of activity there, looked like the dollar initially popped a little higher before then just coming back down. And then it wasn't really until the Asian session when we moved lower. So the actual reaction around the minutes was, was close to none. So what did the minutes say, and is there anything to take out of them? Well, I'm not going to dwell on this too long because, as I said, reaction was pretty tame. But so we're all on point. They continue to say they're ready to hike and remain on track. Another rate hike or rate rise may be appropriate, quote, soon. So this is all absolutely in fitting with Fed communication. They are still wholly priced to raise interest rates in September and then consequently December. One thing though, while the minutes had no mention of the political situation, were full of downside risks stemming from Trump policies. All Fed officials view trade disputes as an important source of uncertainty and risks. Still, a number of officials noted that most businesses concerned about trade disputes had not yet cut back their capital expenditures though, or hiring, but might do so if trade tensions were not resolved soon. So there certainly is a bit of an idea of some nervousness about monitoring of this situation and and the potential downside risks that could come of it. But ultimately they remain on track and rate hikes are to go ahead. So as we were thinking, limited reaction because this is the minutes of a meeting, of course, that happened 23 days ago. So it is quite dated. What's going to be more important, talking about Fed, of course, is Jackson Hole Symposium. Um, not sure if a lot of the newer guys have ever monitored or even aware of the Jackson Hole Symposium, but this has historical relevance for the Federal Reserve as outside of the traditional interest rate meetings. This is a particular meeting that gives a platform for the Fed chair to deliver latest insights on both monetary policy and economic conditions. Now, given the minutes were so dated, what we're more concerned with is, has trade war changed their perception since then? Have these downside risks increased? Or if anything, has the Turkish and EM situation also made that argument more compelling? And that's what we're looking out for really out of the Jackson Hole Symposium. It's going to be the, the latest opportunity for market participants to get a real grasp of Fed thinking. Now overall, I don't think it's going to steer— I don't think Powell is going to particularly change tact. I don't think there's really any reason for him to do so as yet, because remember, obviously there's his credibility through verbal communication is absolutely critical. He maintains that. So I don't think he's going to be, you know, flexible in a sense of just changing words here and there. He wants to be as consistent as possible to remain in control. Now, from a timings point of view, Jackson Hole Symposium starts today, but my understandings are— and I'm looking to get confirmation— that Powell doesn't actually speak and give his keynote speech actually until tomorrow afternoon. So today I think it gets opened by one of the Federal Reserve members. I think it is Esther George, who presumably is the— I think Jackson Hole is in Kansas, and And so she's the head of the Kansas Reserve Regional Bank. So maybe some comments out of her. She obviously is a hawk, but Powell is not until tomorrow. So you'll have to sit tight for that to come later. Let's just have a look at another thing, though. Let me just bring into shot one of the other big headlines from overnight. This is quite a dramatic fall that we've had in the Asia-Pacific session in the Aussie dollar. Now what we're looking at here is a move that happened pretty much from midnight, and then the low point was seen. It's about a 3-hour move during the crux of the Aussie session. You can see we got down to the lower bound of some of this price action from the previous resistance points from the, um, what would have been, what, the end of last week. And why did this happen? Why has the Australian dollar weakened so aggressively? Well, first And foremost, the biggest thing that markets are looking at on this issue is this. So Malcolm Turnbull, who won a narrow victory against rival Peter Dutton, uh, the Australian is now poised for— or Australian country is now poised for a new prime minister. So despite Turnbull avoiding this in recent days and weeks, Australia is now poised for potentially a new change in prime minister following the resignation overnight of 3 of Turnbull's key cabinet supporters, whose departures are expected to spark a second leadership challenge within the Liberal Party. Now, to give you a bit of idea, because I'm not sure how hot or not your Australian political knowledge is, but Turnbull had lost the support of the party and threw their weight behind his main rival, Peter Dutton, who is the former Home Affairs Minister. Who these three supporters are now getting behind to become the next Liberal leader and consequently the next Prime Minister. Now Australia's state broadcaster has said overnight that Mr Turnbull is likely to stand aside in the Liberal Party leadership ballot. This will mean then enabling a guy called Scott Morrison, who's Australia's Treasury Secretary, to stand as a rival candidate to Mr Dutton. Now The question marks are then, so what are these guys' political views? Well, Mr. Dutton is a leading member of the Liberal Party's conservative wing, while Mr. Morrison is viewed as a more centrist candidate. The Liberal Party is, in a case in Australia, deeply divided between more conservative and more moderate wings of the political party. Mr. Dutton has laid out a more populist policy agenda which of course then has quite a large emphasis on including the cutting of immigration amongst other things. So as per the usual kind of, I guess, rule of thumb, political uncertainty in any country, particularly when it goes to the point of quite a shake-up towards more populist policy agendas, uh, in the near-term reaction at least tends to be negative for the local currency. Consequently, Hence the reason why we saw quite an aggressive dip in the Aussie, and we've broken back below the 73 handle. On the recovery, you can see here found a bit of resistance around that previous point of support from the price action, uh, that was seen at the beginning of the week. So in this kind of consolidation phase now, but definitely lower than where we were from where we finished the US session overnight. The other thing of course that we've got is, and this is more Something to also be aware of, but I think is of a lesser impact because it's largely priced in. But of course, this has happened: the fresh duties on $16 billion of each other's goods have taken effect. So you remember, it was a two-stepping stone approach to that $50 billion of trade tariffs that the US were putting on China, and China equally responding in kind. So this has all now gone ahead, of course, and is now being implemented. And obviously trade tariffs, weakening of the Chinese economy on the back of this, in the shadow of this if you like, or in repercussion, is a net negative for Australia because of the close trade ties that Australia has dependent on the performance of the Chinese economy. So those trade talks, although it's, you know, important for the broad economy, is particularly important for Australia as well. Political uncertainty and let's say any negatives that develop in the Chinese economy on the back of ongoing heightened trade war tensions could be incredibly destabilizing fundamentally for the Australian dollar going forward. So something to just contemplate in your assessments on the, the fundamental side at least. One of the other things, headlines and news flow to be looking out for today if you're looking at the pound is this Uh, so of course this chap here is the Brexit Secretary, the replacement of David Davis, and the headline being that leaving the EU without a deal is unlikely according to the UK Brexit Secretary. You remember it was the Trade Secretary Liam Fox who said that the prospect of a no deal is now seen at 60/40, and that, what, 2 and a half weeks ago prompted quite an aggressive move lower in the pound. So Dominic Raab being a little bit more even-handed here but just to give you a bit of a flavour of some of the comments, he has already said this morning that the Brexit withdrawal deal is about 80% agreed with the EU. So okay, that sounds pretty positive, right? 80% agreed with the EU about the withdrawal deal and the framework. Sounds like good progression. However, the remaining obstacles are Northern Ireland and the border. So— To me, this sounds like a broken record. Not to give too much of a political bias leaning about what my views are, but they still haven't addressed the biggest elephant in the room. So I'm not sure how much this, this you can deem as moving forward. I'm sure Europe will still push back. But the point being is today the UK government are looking to publish 25 technical notices today about the kind of ramification of Brexit and so on and so forth. Remember, the market tends to respond from a sterling point of view at least, the more color and the more detail as to the assessment of the impact of Brexit, more information, the more the market kind of likes it because it looks like the government are doing better due diligence, they're planning for the what-if, the no-deal scenarios, This FT report says that, you know, unlike a lot of the Conservative Party members, you've kind of— it's been quite clearly evident there's not a great deal of planning that's going on for a no deal. Dominic Raab's been saying the opposite, that there is contingency planning for every scenario, which for me is quite a good thing. That's the type of, you know, things you want to hear to alleviate any concern or tension, whether or not this is going to lead to any progression in talks. I'm not so sure. So something to look out for today. And obviously this type of news flow, Twitter is particularly good. So those kind of political correspondents covering this news are the people you want to be watching for any potential kind of news arbitrage on getting those headlines quick. All right, quick look at the calendar. We've already had some of the flash or August manufacturing service PMIs. Just to cover off quickly, did have a question this morning. What does flash mean? Well, think of this quite simply as that every manufacturing service PMI data reading that you get, you get two readings. You get what's called, for the PMI specific, because this is Markit, who's the data provider. They have their advanced first reading. They call this their flash reading. and then they have a final reading, which is the, the kind of statistical revision. Now, the flash is always the more important because it's our first time as market participants to see the state of the data in its actual form. Now, one thing you've had in summary this morning, the French service PMI was a little bit higher than expected, as too was the manufacturing. The German readings were slightly weaker on the manufacturing, the service number was slightly stronger. Net-net though, none of the numbers really deviating much from the median consensus, and consequently it hasn't been too much reaction in the market. The other thing is the eurozone number that we get coming up at 9 o'clock is a non-event, of course, the reason being because it is purely the summary of its parts, of which are the various individual country releases, but we've already seen, of course, throughout the morning. So don't be looking for that to spark action into trading activity. Um, going further forward then on the calendar, as we go through, we've got those Eurozone numbers as I mentioned. The other thing then, just after midday, ECB monetary policy meeting minutes. Now again, this needs to be taken into context as these are minutes that are in effect old because they are an account of a meeting that took place, you know, several days, weeks ago now. So really, although we will look at this, and I would definitely recommend keeping the slate clean, i.e., not being in an open exposed position, or if, if so, not of any larger size, just that the potential risk associated with what if something is unearthed in the minutes. But the likelihood is ECB minutes are relatively, um, non-market moving, but something to definitely monitor just for the what-if scenario. Because remember, these are old. What's more important is when you have ECB speakers. But of course, we're in the month of August, and as you'll notice, there is an absolute gap of ECB speakers. Because what happens in August ECB officials all go on holiday. Very nice for them, but it just means then that as a consequence there's not really much guidance that we get from the ECB and consequently not much movement. What I would say, if you're trading the currencies from a fundamental perspective, it's more the dollar I'm concerned about right now than it is the euro currency. I'll be looking for that dynamic to drive market prices, otherwise Just having a quick look into the afternoon, we've got the kind of respective readings from the US stateside, quarter 3 manufacturing and services, the flash PMIs, housing data, new home sales at 3 o'clock. And then the Jackson Hole Symposium is going to be kicking off later on this afternoon, and US-China trade talks are due to recommence. So that's obviously another thing to, to keep an eye out on. Okay, that's pretty much it. I know I've not really talked too much about the charts technically. I know Sam will probably add a few thoughts into the chat, but I know, as is technical analysis, you guys, uh, all have your own way of looking at the market. So hopefully the fundamental view at least is giving you some preparation for the day ahead. Okay, that's it. I'll see you in the chat room. Have a good day. Thank you very much.