Morning Briefing - 24th September 2018

Okay, so good morning. Monday, 24th of September. That means we're just about to kick off the final week of Q3. Kind of crazy to think we're about to hit the final quarter of 2018. It does seem to have zipped by pretty quickly. But what's happening this morning is a slight risk-off vibe if you're— well, it's a bit of a mixed bag, I have to say, across markets, but certainly equities. And here's the S&P taking a knock. This is taking the lead from Asia where we're seeing some pretty sharp downside in some of those Asian stock markets. This is as a result of the China-US trade war risk. I'll talk about that in a second. That's one of the big themes influencing sentiment this morning. However, in other markets, oil's a notable one with a— we just had a, over the last couple of hours, a sharp step higher and another push up through, actually briefly, we're below it now, but briefly up, back up above the $72 area. So breaking up through Friday's high. So we'll talk about oil, we'll talk about what OPEC and non-OPEC decided over the weekend at their meeting and why that's pushing prices the upside. Um, cable of course is never far from the, uh, the spotlight, and certainly huge volatility back end of last week. Um, in the end, uh, sharp, sharp, sharp declines, biggest down day for over a year on Friday. But actually a little bit of upside here, so we'll talk about this because, um, cable still well up above that 130 handle. So despite what seems to appear to be at least a kind of negative turn of events on the Brexit front, you're still seeing sterling relatively elevated compared to recent months. And we're also going to talk about T-notes, and we're going to talk about the Federal Reserve, who are most likely going to raise rates this week. And on the weekly chart here, T-notes made a big move to the downside. This is yields higher last week. And just about to threaten and test the 4-year low on price, which was set back in May. So these are the kind of themes that people are looking at as we begin the week. So let's start in China and let's get an update here because this is quite a simple graphic which is just explaining the, the state of affairs. You make that a little bit bigger. So today is significant, the 23rd— sorry, 24th of September, and that's because this is the day where the latest extension of Trump's tariffs have now come into force. So this is adding a 10% tariff onto an additional $200 billion worth of goods coming into America from China. So look, we're about halfway now, very roughly, in so much as about 50% of slightly lower, as you can see, but roughly about 50% of goods coming into China now have a tariff added, a tariff added as a result of this, this, this trade war initiative from Donald Trump's White House. So, I mean, last week was interesting. If I just go back to the charts and we just look at the S&P's behavior, because, you know, it's a good example of market behavior, I think last week was interesting because you know, when we got ever closer to this scenario that these additional tariffs would be added, well, actually the S&P surged higher. And in the end, you could argue that when just specifically looking at the trade war risk, well, a 10% tariff was actually a smaller tariff than some were fearing. Trump has gone on to extend and say, well, we're gonna increase tariffs by 10% on those $200 billion worth of goods. But at the end of this year or the start of next year, we'll look again at that and if there's been no movement on China's side on this negotiation, then we're going to potentially increase those rates to 25%. But some were fearing that 25% tariff bang straight in your face last week. So at least that hasn't happened. And in the meantime, the US economy is on an absolute tear. So you've got huge sort of US economic momentum. And whilst this trade war risk is definitely bubbling along and you've got people in the press this morning You know, talking about this step by the US to add tariffs to $200 billion, you know, really talking about this as not a trade war, but actually a cold war. So this has been bubbling along and yet US stocks don't seem to mind too much. And that's because their economy is just on fire. Of course, what happened over the weekend was China's— China have said, right, we're refusing any more talks. We're not interested in coming back to the negotiating table. Until Donald Trump stops his threats. Okay, so really this has, I would say for now, brought to an end the likelihood of any kind of progress being made. Literally now the two sides are entrenched back in their own countries and completely unwilling to have any kind of dialogue. Of course, this does not bode well when you think, as I just said at the beginning of this briefing, we're about to start quarter 4%, and, you know, we could well see these tariffs step up to 25% in literally just 3 months. So given the rate of progress that we've seen in over the summer, you know, it's definitely not going to be a surprising situation to find ourselves at the end of this year with absolutely still no major progress being made, and then of course Donald Trump coming in with his threat. Of course, what happens in the midterm elections, you might say, in November, might shape what Trump does next, but to be honest, I don't think it will. I think if Trump does really well in the elections, that will give him the kind of justification for carrying on being aggressive. If Trump does really badly in the elections, he'll probably react to that by again being more aggressive. And so I think either way, I don't think the Trump administration is going to back down from this. And now China aren't happy with the way this is being dealt with, and Yeah, so we're left with this situation where no progress, no, no, no dates for any more meetings, and we kind of roll on with this risk. So the S&P stepped lower this morning, but if we look at this chart on a weekly basis, such a, such a phenomenal chart this. Of course, we smashed to new all-time highs as we've entered into the kind of entered into September, and we've extended that last week, and it does feel like 3,000 potentially is inevitable here in terms of a target on the upside. So certainly US stocks generally very strong, however, taking a little bit of a hit overnight and we've stepped lower as Asia's borne the brunt of these developments over the weekend. So that's one situation, of course, that we obviously need to be continuing to monitor whilst we stick with the Let's, let's stick with the US, um, and I'm going to show you a graphic. Just hang on one second. Uh, let's stick with the US because the other big event— well, actually, before I'm going to change plan, here's a look at the week ahead. Um, this is what's on the slate, and I guess today's a quiet day apart from a couple of items. And we'll look at today's calendar in a little bit more detail at the end of this briefing. But certainly the German IFO number at 9 AM. So I do want to make sure I finish this briefing at least 5 minutes before 9 AM so that we can focus in on what actually is the most interesting data of the whole session. So that's the German IFO business climate number. So we'll talk about that in a minute. We've got Draghi talking this afternoon, but that's about it. It's very quiet. No US data whatsoever. Asia's been pretty quiet. There's been a couple of kind of, um, national holidays in China, for example. So, um, some market volumes in the Asian session very quiet. But as we go through the week, things pick up in terms of the number of items, um, on the slate. Um, so you got US consumer confidence, probably pick of the bunch in terms of economic data. Um, although that will be the final reading. We got Trump attending the UN. Security Council meeting. As we go into Wednesday, we've got core CPI out of Japan, we've got some housing data from the US, of course weekly oil inventories as always, but the key focus of Wednesday and probably one of the key focuses of the week without doubt is the US Fed interest rate decision coming at you on Wednesday where they're going to hike rates and it's really more about the guidance, you know, in terms of rate hike expectations for December and I'd say more and more rate hike expectations for 2019. So We'll talk about that in a second. Thursday, things are building in terms of the number of items here on the slate. And just German CPI preliminary reading jumps out at me as being something pretty key here on this list. What else? Housing data, Draghi talking, Powell talking, although he would have already spoken the day before because this week's meeting is a full-on Fed meeting with the full monty. The change to the dot plot matrix. We'll have a Powell press conference and all the rest of it. Moving into Friday, final day of the week, we've got EU flash CPI estimates, retail sales figures coming out of Europe, and what else have we got in there? Chicago PMI, University of Sent— Michigan sentiment, um, and so on. The other kind of thing which you can see down at the bottom We do have— well, I'll talk about in a second is we do have UK politics kind of stepping into a slightly different gear because we've got the annual conferences for the likes of the Labour Party this week and then the Conservative Party. And this will be just another chapter in this saga that seems to be never-ending. But before we move any further, let's just talk about the Fed. We'll obviously cover this in huge amount of detail on Wednesday, but actually it's all about the dot plot matrix here. Obviously, everyone's expecting a hike despite trade war risk. You know, the US economy is just powering on, and definitely rate hikes are continued to be required, and we're going to get one on Wednesday for sure. So it becomes more about guidance going forwards and how are we going to see the dot plot matrix change. And looking at this for 2018 and 2019, median dots It's unlikely the median is going to change, but we might get a couple of members of the Fed increasing their year-end 2018, year-end 2019 estimates. But that won't be enough to actually kick up the median dot higher. It will just result in a greater concentration at a slightly higher yield. What we're actually looking for is potentially 2020. And maybe 2021, or you could say longer term dot, perhaps the median might move higher. It'll only take just one Fed member to increase their dot for 2020 to actually see the medium increase. I would say that, you know, 2019 is key. I think over the last 6 months, investors have kind of backed off the idea that the Fed are going to have to continue to hike rates through next year. But I do think in the last few weeks, as we've been seeing continued very strong US economic data, as over the last few weeks, I think people have changed their minds again and we've gone more hawkish. And I do think rate hikes will extend into 2019, whether it will be one every quarter. Obviously, we'll have to see. Something that will be interesting now that we're in the final week of Q3, I mean, in a couple of weeks' time, we're going to get the fresh round of US corporate earnings, of course. So Q3 earnings season will kick off kind of mid-October, and we'll get a further read on just how much US companies are enjoying not only the huge benefits of Trump's tax cuts, but also the fact that the, you know, the domestic economy is powering on. So the Fed is a key focus for this week. Let's switch back to the charts. Let's talk about something else. Let's talk about crude oil. So over the weekend, we had OPEC and non-OPEC Countries' ministers meeting to discuss what's going on from a supply and demand perspective, particularly looking at Iranian supply and how come November we're expecting the US sanctions to start biting on Iran. And we're expecting— and it's hard to judge— but we're expecting maybe as much as 1 million barrels of Iranian crude going offline. And so that, that supply has already begun to to drop, but we're expecting it to continue to drop. And what the OPEC and non-OPEC countries decided over the weekend is to not increase production by a greater rate than they'd already agreed to back at the OPEC meeting in June. All right, so there's speculation that maybe OPEC were going to think, now that this Iranian situation's come in, maybe we should look to actually increase production more by more than we agreed to in June, just to offset more, you know, more Iranian crude going offline. They've decided against that. So they're just sticking with their June commitments. And actually, so far, you know, here we are coming into October almost, and they have not been increasing production as quickly as they said they would in June. And they're not increasing production by more than what they said they would in June. And so this has turned into, you Now, this has been influencing the price of oil for the last week or so. If you check out on the daily chart, last week was a punchy week. We stepped up, we tested these highs that we had from August, and then we broke that. A bit messy, but certainly today looks like we've really properly taken out that, that mid-August— or sorry, actually it's the start of September high, isn't it? The 4th of September high. We seem to have just properly taken that out now, technically. You know, here we are trading up above the double top from Thursday, Friday, and that clearly now marks a step to, I would say, probably drive up to test the high of the year that was set back in June. If we look at the weekly chart, then there is one more kind of key barrier on the longer term on the upside before we get to that high of the year. And that's the high we had back in May 21st or the week beginning 21st of May. We topped out. 70. So we topped out at— what was the high there? 72.83. So perhaps that's first target on the way up here early this week. But I'd say, you know, more broadly over the next week or so, you know, you— I'd say certainly technically, both long-term technically and short-term technically, this is looking again pretty bullish. You should expect perhaps a move to test that high. That is the 4-year high. Of course, you've got to go back to 2015 and indeed— sorry, no, 2014, back end of 2014— to find the last time we were trading up above $75. So oil pushing higher as a result of those comments and the news flow from that OPEC, non-OPEC meeting over the weekend. Okay, let's talk UK. Actually, no, I'm gonna talk T-notes, then we'll finish off with the UK. As a result of that, you know, hugely powerful sort of momentum that we're seeing on the US economic front, as a result of the likelihood the Fed are gonna absolutely hike rates this week and then guide us to say we're gonna hike again in December, and maybe we're gonna have to continue to hike as we hit end of Q1 2019, maybe end of Q2 2019, You know, what you've seen here is that US T-notes have been ticking back lower. And technically, this is pretty big, I would say, something we definitely need to be monitoring and aware of this week is— and this is on the yield front. This is 3.09%, I believe, is the 2018 high for yield. Here we're looking at price, of course, on the futures. So 118.10. Is that low point that we had back middle of May. All right, so any, any kind of movement through there will start to get some attention. You could say on the one hand this is good news, and the only reason I say that is because if you're one of these guys who's worried about the US yield curve flattening and maybe even inverting, well then obviously long-end yields climbing, well that's a good thing, that means the curve's steepening a touch. But obviously the short-end rates are also climbing, and they especially— and they will again, of course, if the Fed's hawkish on Wednesday, that short end's moving higher as well. So on the one hand, you could say those worried about yield curve inversion, if we do get this 10-year pushing down through to make new lows on price for the year this week or next week, then that would be good thing. That'd be a good thing. But then you could flip and say, well, actually, this is really taking borrowing costs now to the next step up in this kind of post-crisis era. And of course, we're always worried about the fact there's a huge amount of corporate debt out there. And so, you know, as the Fed continues to power on with their rate hikes and as the longer end of the curve, you know, is able to shift higher as well, well, then, of course, broadly, the cost of borrowing is going to be ratcheting up across the spectrum. And this, you know, is cause for concern. So a bit of a double-edged sword with this one. But certainly technically, 1.1810, something definitely to look out for. As we go through this week. Let's finish with cable and talk about Brexit. And here's a, here's a line for you from the kind of news flow from over the weekend. Let me get it for you. UK Prime Minister May's aides have reportedly begun contingency planning for a snap election in November. This is in order to save the Brexit talks and indeed to save her job. So these are the kind of latest rumors. Obviously, quite a remarkable few days for Theresa. Obviously went over to Europe and got kind of mugged in Salzburg. Came back, kind of started to become a little bit more defiant. Her speech on Friday was, you know, the Chequers plan is the only credible plan on the table. Basically, take it or leave it. Either take that or we're out. We're hard Brexit. A bit more kind of forceful from her. And actually, over the weekend now, you've seen developments that are maybe— I mean, I don't know whether, whether to believe these or not, to be quite honest. Because one thing that's happening also over the weekend from the Conservative Party's opposition, Labour, you've started to get quite radical talk, very Corbyn-esque type kind of policy, where they're talking about all publicly listed companies that have more than 250 employees, 10% of that company's share ownership will be passed to the staff of that company. They will then enjoy benefits in terms of dividends, they'll also get voting rights, and it's about trying to, I guess, address some of that wealth gap that seems to have been expanding in recent years as a result of low rates and so on. But it's also, you know, very typical kind of Corbyn type of policy. It's certainly grabbing the headlines here this morning. You've also got the situation with Corbyn saying, yeah, all right, we'll have another EU referendum if my Labour kind of supporters want it. So these are the kind of developments from the Labour Party over the weekend. But then, do we get a November election? It's a gamble. It's a gamble from Theresa May. I mean, the last— she's not got a good track record when it comes to campaigning for elections, to say the very, very least. The last election was an absolute car crash from her point of view. So whether they want to make that dramatic bold step and go again to the electorate. I think that's a high-risk play, but maybe she feels like she's being forced into it. It's either lose her job or have an election. So who knows? Desperate times. So what's happening with Cable? Big sharp downside, of course, on Friday after the Salzburg saga. If you go to a week— let me go to a daily chart though to get this in perspective. As I was saying, we'd had a great September for sterling, That's appreciation in the currency because it looked like we were moving towards a more kind of softer Brexit, Chequers-style deal. But of course, that apparently now is not possible from the EU side. So what happens to sterling now? Well, don't forget, part of this upside was also about the inflation data from the UK. So don't, don't just get entirely distracted by Brexit. We do have an upside inflation tick that was very large. Promoting maybe further rate hikes from the Bank of England as we go into year-end. The November meeting is in people's sights for maybe another rate hike. So don't forget about inflation rate hike expectations here. But certainly we're consolidating Friday's move here. We're going to get Brexit, we're going to get Conservative, we're going to get Theresa May, we're going to get Labour and Corbyn headlines dominating the UK press all the way through the whole week. OK, so this is going to be with us. Something we're going to have to navigate through. But for now, a slight— if we just go back to this morning, a slight uptick here from sterling in recovering from that biggest sell-off for more than 12 months from Friday's session. Pivot on the way back up. We're actually just finding we've just gone up through a bit of the resistance that was the low point from the 19th of September here. So just back, pulling back to test that now as support. Okay, pivot on the way higher is kind of next target, I'd say. Right, finally, um, back to the data calendar for today, and we've got the most important data of the whole session coming in 6 minutes. IFO Business Climate. This is one of the big numbers from Germany that we get each month. And let's have a look at this because last month was a stellar print, 103.8, really defying expectations. We've been trending lower throughout the whole of 2018, and this is all part of that story about such a powerful 2017 for Europe. Europe is back, you know, delivering growth yet again, and that just kind of all stalled as we hit Q1 2018, Q2 2018, and the The German IFO data is the perfect barometer for that whole story until— bang— August, complete flip of the trend that we'd seen from the rest of the year. Huge step higher, 103.8, really caught everyone by surprise. And it was like, well, maybe Europe's through the soft patch of the summer and maybe we're going to get a little bit more momentum building as we go into year end. So today's number. Is expected to be 103.0. So that's basically a slight dip from what was a very strong reading. Anything above 103.8, anything above 104 here would be really interesting, showing that this was not a one-off blip. And actually, maybe certainly the German economy at least is showing signs of life. However, if we snap back, if it's anything below 102, will be particularly depressing and disappointing. We got our hopes up with that August reading and it was all for nothing. It was just a temporary blip. So I'd say, you know, to really get movement here, we want something north of 104 or something below 102. Okay, so that data is about to hit the wires, so I'm gonna let you guys get on with it. We'll be on the mic throughout the day. Enjoy the session, enjoy the week, final week of Q3. All right, thanks a lot.