Morning Briefing - 26th October 2018

Okay, very good morning everyone. It's the 26th of October. I'll be delivering the brief today, 2 days back to back. Um, so let's start off by talking about the main event overnight, which was the earnings being released by Amazon and Alphabet. So that's Google's parent company. Both those rather disappointing, as you can see here. Amazon and Alphabet's growth earning engines sputter while spending surges. That's quite comprehensive. So what we were seeing is that the growth forecasts for Amazon and Alphabet were actually quite disappointing, with Amazon's sales missing expectations for 2 quarters in a row and disappointing revenues and profit forecasts going forward. This resulted in Amazon closing some— minus 7% after hours. With Alphabet, we also saw revenues grow at 22%, which on the face of it does seem pretty good. However, this was lower than the previous quarter. So again, quarter on quarter, um, growth going down while spending was rising. This resulted in Alphabet closing up 4% lower on the session as well after hours. So all in all, this is quite negative. This was sort of the main event, I feel, that could have potentially caused reversal in risk sentiment and ultimately drive stock prices higher. As you can see, if we turn to the charts, let's look at the S&P as sort of your, your base index here. You know, has your tech companies in it as well, uh, quite broad-based. So after what we can see has been quite a dramatic sell-off, maybe not as dramatic as we saw in February, but, um, again, just looking at what we were looking at yesterday, having fallen into correction territory, um, we did find support at these levels, and then we were staging a bit of a recovery from there. I think people being a bit dramatic, but, you know, it was up 2.71% from its lows within less than 24 hours, which is quite positive. So So stocks are very much on the front foot going into this event. And then as you can see, market closes, earnings come out for Amazon, Apple, and you see S&P completely pair all gains that it made during the European and US session prior. So very much back down on our lows over here. Personally, I think we're absolutely going to take out this, this low over here. Just given how negative we have started this session, I would say that would even happen today. If we turn to the DAX over here, having a look, you know, DAX gapping lower, very much at the bottom of its range right now. Price is supported at this S1 level but looking pretty fragile. Eurostoxx also attacking this S1 level as well, nice and early in the morning. So both European equity markets where the highest volume is quite, quite negative sentiment to start the day. Looking at Bunds gapping up higher and at the moment on the front foot. So given what we've seen happen with the revenues, forecasts and earnings for Amazon and Alphabet, I think that that was basically solidified the fact that this risk-off tone is now looking to continue. Europe being our lead indicator, I'd expect this 10% mark to give way, and then that will open up some room to the downside. So let's have a look where we could go following, um, following a breach. These are our lows at the moment. So we have some lows just down here. We do sort of fall into open air once we get past this lows. The next area of support I'd potentially see is this 2615, a couple lows down there. After that, 2600, sort of by the end of next week or the week after. Very reasonable, I'd say. If this level gives way, that's really the only place we could find some potential support. So things looking still pretty fragile in the equity space at the moment. This was also following suit from China, where we saw, um, Asia-Pacific stock indexes also tumbling as well, despite obviously China's injection of liquidity, etc. So quite fragile. Same story in the NASDAQ. If we were to put back on our pivots, NASDAQ has, with the S&P, with the tech focus particularly, very much on its highs coming into the close. People and market, um, participants quite optimistic about the earnings and revenues coming out, but actually quite disappointing, very much just giving back majority of the gains made in the prior session. The Dow Jones slightly less impacted, I'd say, given the fact that there's no technology focus here, as with the S&P and, um, NASDAQ, but very much, um, underperforming as well following, uh, the earnings. What I would keep an eye on is actually the NASDAQ. I would expect the NASDAQ to give way to this S1 before I'd expect the S&P to give way to this previous low. So I think given the fact that this was tech-related, I'd be watching the NASDAQ as a lead indicator to see if the S&P wants to go lower. So amidst this risk-off tone, one thing which is, I'd say, a source of happiness is gold has reemerged as a safe haven. So given the risk-off sentiment today, if we have a look at gold over here, very much taking out this consolidation range, quite a tight range over the Asia-Pacific session. Now, the reason being we, one, had dollar strength weighing on gold prices whilst now it's reemerging as a safe haven. So I would be wary here. I mean, gold, I wouldn't say is still as responsive as it once used to be. But, you know, we are seeing it return as quite a good asset in periods of risk-off. Having a look at it technically, this R1 really does define the top of the range. I imagine there'll be some resistance over here given the fact that risk management would be quite easy or well to do. But a break of that would definitely lead to some acceleration as we see some stop losses above here, and that'll take us out of a range which we've sort of been Well, look, we ranged, we broke out, and then we ranged again. So I'd be expecting something quite similar to this kind of price action. If S&P takes out that 10% low, I'd expect that bid to go through gold, taking out R1, hitting these stops, and acceleration definitely to the upside. Uh, $1,250, just looking at price alone, seems like a reasonable expectation. Um, so yeah, taking out these $1,250 to the upside. Let's have a look. And you can see really after this massive sell-off we've seen for the whole 2018, we are seeing a convincing uptrend at the moment, really taking out these, this lower highs that we were seeing here. This trend over here finally getting breached, taking out that 1,200. We move higher, we consolidate, now we're looking to move higher again. There's also this key level here, 1,235. Ah, okay, that was a continuation. So that 1,235 was pretty much riding resistance at the moment now been given way. So gold looking quite a, quite an interesting product going forward. Now the caveat here is the dollar strength, and I think that's set to continue. I know we spoke about this yesterday, but I just want to quickly bring you to the dollar index chart. So what we are seeing is sort of a perfect storm brewing for the dollar index, or the dollar, or the Dixie as a whole. One, we're seeing the risk-off turn. So we are seeing that safe haven flow going into the USD, which, yes, is not the same as, let's say, the Swiss franc or the yen, but very much a second-tier safe haven currency. So we're seeing that money flow into dollar demand increasing, price increasing as well. We also had two Fed members, so the Fed Vice Chair Clarida speaking yesterday, as well as Fed's Mester speaking yesterday. So Fed's Mester being a hawk. He said that US policy remains accommodative and the need to raise rates into neutral territory, which is to be expected from him. Um, but Chair Clarida, she I believe is much more of a centrist. For, so for her to say, um, some further rate hikes are warranted while he sees current policy as accommodative and higher rates will be appropriate, that's coming out as quite hawkish. What this goes to show is there is no doubt whatsoever that the Fed members are following what's happening in the financial markets. So given we've seen a 10% correction and things look to worsen over the next couple— I'd say next couple of days, if not weeks— for then Fed members to come out and to continue their accommodative, their hawkish stance, basically indicating that the December hike is absolutely on the table and not sort of showing any indication of backing away from the 2019 forward guidance at the moment. Would indicate that actually they're looking to go ahead with their hikes despite the fact, um, that the equity market or financial markets are looking a little bit under pressure. Now, of course, they have no mandate to support equity markets or financial markets. Their aim and objective is price stability. But this is, yeah, this is again adding nervousness to investors. So on one hand, we're going to see the hike, which strengthens the dollar. That will also weigh on equities, at least in the short term, which then causes safe haven flows into the dollar. So, um, you know, good on them, good on the Fed for continuing with their rate hiking cycle. I think, um, in my view, it's the wise thing to do. We're seeing this downtick in the equity market, in my opinion, due to the fact that we are coming to the latter part of the economic cycle. We are seeing interest rates go up. We know corporate debt's at record level highs. Unemployment is low. We're seeing wage growth. Inflation is starting to tick up. So this equity market is under pressure, yes, by trade wars and etc., but what initiated it was higher yields. So this means that people are nervous about the cost of debt, the cost of borrowing going up. So if the Fed was to abstain from hiking interest rates, actually they'll be walking into a much bigger disaster than, let's say, a bear market in the S&P, maybe 1 year, 2 years down the line. There's no time like the present when we have 4.2% GDP growth. So I think— and at least in the equity space, things are set to continue to, to the downside. Volatility is set to increase. I believe this 10% mark is going to give way, and we're in for an awesome November. Then we may see a recovery in December as well, the Santa Claus rally. So that might be quite fun. Sell it in November, buy it in December. Having a look at T-notes as well. So T-notes on the front foot. So we're once again seeing the safe haven flows into, into the bond market, which I guess will take some of the sting out of the recent sell-off we've seen in T-notes raising yields. But I wouldn't be complacent just because these prices are going up. This is not people winding down their expectations for rate hikes. The Fed members have come out and been as hawkish. This is just people getting a little bit nervous. But key level being tested at the moment, really up at the top of the range here. So you can see quite an interesting session ahead of us, quite a lot of assets right up here at the top of their range. So there's definitely interest around these levels. So I'd say a break of here may see a clean run up to this 1.1831 level. Any breach of that, then really, you know, I think that'll be us done for the day at least. I don't think the S&P is going to move that aggressively, but it'd be interesting to see, you know, if we can go and maybe even get the first breach of that level today, really just cementing this risk-off turn. Um, but we may see that balancing effect as prices go higher, take some of the sting out of the equity market or borrowing costs. So T-notes, I expect to continue on the front foot. So once again, a breach of R1 may provide a good classic opportunity to take it up to 11831. Having a look at your FX pairs, um, dollar strength still being the story. So despite the Fed members coming out and speaking, they spoke around 5 and later This really, this move low we saw in EUR/USD was basically based, happened immediately after the ECB event, which could be misinterpreted as a dovish ECB event. It wasn't a dovish ECB event. Draghi has now become the— Thank you, Betty. Thank you, Charlie. So I was just talking, sorry, about T-notes over here, this R1 level. Quite key. A breach of that will take us up to this 1.1831, and these highs over here would be sort of a realistic target for the end of the session today. Moving on to EURUSD, this move we saw lower yesterday, this would maybe misunderstood as a dovish ECB event, but that wasn't the case. I know Anthony Cheung was covering this, and this was just basically, well, which way has the dollar been going The dollar has very much been in the downtrend. Traders stepping out of the market, not really doing anything from the moment it opened all the way through to the ECB event. Finally, ECB event finishes. Okay, status quo continues. Dollar continues to strengthen. Evidence of this was the fact that cable was also moved at the same time and the Aussie dollar also facing pressure, actually. Yeah, coming under some pressure around there. So I'd expect this to continue. As well. I'm looking at this chart technically. This pivot level looks pretty interesting, uh, bottom of this, this range we had. Got some resistance here and some support. So pivot looking quite interesting. Levels above there, you know, we have this whole area which, you know, if we get there, this is going to be sort of a place where traders are really going to be looking to get involved. We have support, uh, support and resistance all coinciding quite nicely together. Similar story in cable. I'd definitely be waiting for a retracement, not really wanting to wait for a break and taking classics. You know, it's too steep to look at it very crudely. What I prefer very much is sort of a pullback. Now, this pivot not looking too enticing, um, but these lows that we saw on— was that Wednesday? Now, the lows of Wednesday looking pretty good. I'd leave R1 alone, quite a choppy little region there. This would be pretty good. You can manage your stop, you've got the 1.29 handle, you can put— tuck your stops in just behind these lows over here, take it down to pivot and probably the top of the range today. But at the moment, the FX market looking rather range-bound. Well, um, yeah, uninspiring day yesterday after huge moves to the downside following on this risk-off tone and dollar strength. Uh, facing some pressure at the moment, just in the consolidation range, but this R1 looking really good if we can get up there. Put your stop in behind that 68, uh, level and then sort of try to play the range, taking it down maybe to 67. Ultimate targets being around this S1 level, um, maybe quite a tricky hold, but if we get up there, definite place to be selling. Good risk reward on that trade, clearly defined range as well. And we're discussing gold earlier, still very much on the front foot here, uh, that R1 looking quite enticing. Uh, gold is a little bit difficult actually because what's going to drive it is we're going to see the risk-off tone driving gold higher, or are we going to see the dollar strength drive gold lower? We very well— you could then use that as an argument to say, well, then actually it's going to be trapped in a range, so this is a good entry. Personally, I think there's better opportunities out there. I think, you know, you've got euro— well, especially sterling weakness, given what's been happening on the Brexit front, which I'm actually going to touch upon very quickly. Um, transitioning across, so I think, um A status quo also continues for Brexit. So Brexit talks on hold while May's team in disagreement. Um, so this is saying that the cabinet is not close enough to agreeing on a way forward for top-level Brexit negotiations to resume. Um, you know, yesterday I did the brief and there was some positivity regarding the Brexit situation. I did choose to look over that just because I didn't believe that that would filter through into anything whatsoever. I was discussing this with the Stage 2 guys Fine, we had some good news yesterday. Theresa May survived quite a critical and crucial meeting. But no doubt about it that we were going to see a complete reversal of this. And once again, the cabinet's not in order. The strong and stable government she promised us is not there. Isn't that right, Sam? And yeah, our house, let's say, is a mess. So sterling negativity plus dollar strength. Keep selling sterling until Theresa May steps down, would be my opinion. Finally, let's look at the calendar ahead, and then I will let you guys get on with it. We do have a busy session. It's going to be exciting. Um, let's have a look. So what have we got so far? So we have the Russian Central Bank key rate decision. So if you guys are trading the ruble, then that'll be interesting for you, but I'm going to give that a little skip over. Now we're going to do full rundowns ahead of this data, but just to look at it top level at the moment. We do have GDP numbers coming out of the US, so for Q3, um, that's going to be critical actually. Let me just— not full rundown right now. GDP US. The reason this data is going to be so important is one thing which has been sort of underpinning the fact that stocks were staying quite buoyant despite risks increasing, um, was the fact that we saw a stellar reading of 4.2% previously quarter on quarter. Which is obviously buoyed by the tax cuts in particular, and obviously low unemployment and cyclical factors as well. But really due to the fact of confidence, tax cuts, and this has been— this number, I feel, has been the one thing that you could throw in the face of any single equity bear in the world. But we're now going to get a revision. Now, if this goes higher and we are seeing continued upside momentum in the US economy, then absolutely stocks very well could recover. However, any deterioration back to normal levels, and I would think this will be a disaster. So even a good reading of 3%, you know, well, let's see what the expectation here is. 3.3%. So 3%, yep, back to normal levels would be atrocious. So key, key, key data set. And I wouldn't be surprised if we continue to see just range-bound markets in your major FX pairs following on from— sorry, just in anticipation of the GDP results. So I cannot stress the importance of this enough. After that, we have core PCE prices. So that's obviously, as we say every single time these come out, the Fed's preferred measure of inflation. So key numbers. even though it is their preferred measure, I don't really see huge amounts of volatility, some short-term volatility for sure. So keep an eye on that as well. So that's for Q3 advance readings. Then we have Michigan sentiment data. These are final readings, so slightly less important. But given where the equity market is trading, I'm sure any soft data coming out may pose either a risk to— a risk or a benefit to the equity market. So very much a US-driven day. I think everything's going to stay on hold till 1:30 until these GDP numbers come out. So, um, be cautious, take smaller size, expect range, range-bound market for the dollar ahead of these numbers coming out. And then we will see that potential volatility from 1:30 through to 3:00 to 3:30. Having a look at Fed speakers, we have Fed's Mester speaking, and he's speaking at— oh nope, sorry, that was overnight, not the one I'm interested Sweden. Um, okay, overnight as well. So these have already happened. Uh, I'm sorry, ECB Draghi. So ECB Draghi is delivering a keynote presentation at the end of the conference on understanding inflation dynamics, which is obviously quite important given current market context. But if anybody's been watching Draghi, this guy has become a magician in his forward guidance abilities. So is he going to lead to any market volatility? Probably not. So keep an eye on it, listen to him. Listening to these central bankers always be something which I'd encourage people to do to get their view and understanding of the market. But Draghi is way too smart. If he had anything to say, he would have said it yesterday. And then ECB Corée speaking in Paris. No title there at the moment. In terms of earnings, we do have a couple coming out. So Total. So we have some energy names. Heineken coming out as well. Given the fact that we've had quite a good summer in Europe, I imagine alcohol stocks are going to be quite positive. We have Santander reporting. I know I haven't been following the story too closely, but there has been a court which has come out to discuss or to impose that Santander pay stamp duties, I believe, which they were previously getting customers to pay, something on those lines. So Spanish banks are looking a little bit unstable. I will try to find some research and send that out regarding that. Okay, in the US, no real big names at the moment. But yeah, interesting session ahead. I definitely would be a little bit cautious in the morning. Okay guys, that's the end of the brief. Thank you very much. Have a good session. I'll be in the chat room if you have any questions. Thanks.