Morning Briefing - 28th August 2018

All right, very good morning. It is Tuesday, 28th of August. I hope everyone is well and enjoyed the long bank holiday weekend. One thing, if you were watching markets either yesterday or coming in this morning though, you'll realize that we've managed to eke out fresh all-time highs in some of the US indices once again. And we've had a little bit of movement, not this time on China talks or anything like that, or EM currencies in Turkey. There's a bit of a move back to NAFTA, so a bit of an update on that from developments where the US and Mexico have made a bit of a breakthrough in talks. It's obviously helping a little bit of the short-term sentiment, but we'll have a little bit of discussion and a view of where we go from here on that particular theme. But kicking things off, let's look at these US indices. I mean, this is a 30-minute, but pulling it on a daily continuation, you can see So Sam, with his call back a few weeks ago, that when we printed that low, what was back in— I think it was when he called it right back here in the midst of June— it eventually has played out. So we've had to obviously the net positive situation developed from corporate earnings season, obviously lent a hand by the corporate tax cuts, but but fairly robust overall despite some isolated blips like Facebook. Otherwise fairly solid economic growth still remaining a kind of a narrative, at least for the, the US, despite some of these external developments occurring. And then here we are punching through technically what was the first test, which was that early August push, broke through that, and really yesterday in what was fairly quiet conditions given the fact that UK was closed, but we've managed to make an assault on that 2900 for the first time ever and obviously taking out that high from the beginning of the year. For the NASDAQ, obviously it's been a real tech story despite the, the wobble that we saw after that kind of Facebook earnings and the Cambridge Analytica scandals of months ago. Here we are right back up at these this kind of record territory again, and technically above quite a notable level, just above that 7,500 in the daily continuation on NASDAQ 100, lagging slightly the Dow a little bit further to run until we get up to that territory from right at the beginning of the year before the shakeout came after a bit of a spook in the market from a heightened wage data in the payrolls report that consequently saw quite a wicked pullback at the time, but we are gradually making our way higher. And having broken that, uh, again, respective late February high, uh, it wouldn't be surprising at all to think that at some point we get up to that point. So continuation of what has been the ongoing trend, I guess, for US equities. But a couple of things to just have a look at. One is the NAFTA agreement. So what is the latest here? Then we'll look at a few other associated charts and things to be aware of. So this is the headline: US and Mexico have reached a breakthrough in efforts to revamp the NAFTA trade agreement. One of the important things here though, this is the US talking specifically with Mexico. It's unclear at this point what is going to happen with Canada, which is obviously the other partner in this NAFTA agreement. I think it's until Friday that they've got as a kind of muted timeline for Canada to really respond. Mr. Trump so far has been pretty confrontational with Canadian officials in particular, saying the US was prepared to plow ahead exclusively with Mexico even if Canada was not on board. If that was the case, they would scrap the name NAFTA due to its negative connotations and be replaced by the US-Mexican Trade Agreement. Couple of things here then from a kind of finite point of view. Two sides agreed to stricter rules for Mexican car exports to the US. This was one of the quite key conditions. A little bit tied to this about minimum wages and so on. A deal maintaining trade-free tariff for farm products. But one of the key areas here was regarding a US insistence on a review of the deal after 5 years. The US have buckled slightly on that and just moved the goalposts by resolving and giving the deal a 16-year lifespan, but allowing parties to revisit the agreement after 6 years. One thing to note though, that the US offered no commitment to dropping their US tariffs on aluminium and steel from Mexico and Canada. So irrespective of the fact that, you know, Mexico have signed up, or or it looks like that's going to be the case to this deal— they still have those quite key elements of the tariff still in place at the moment, which is, I guess, they've got a stronghold on these negotiations. From a trade or Trump perspective, I see no reason why he would give that up, but it's just quite incredible how he's kind of forcing the issue and using a lot of these other kind of tools in order to get what the US want. One thing with this though, and obviously this has been of light relief to things like the Mexican peso, obviously for US equities yesterday it did help assist some of the sentiment short term. But this is just a graphic here of looking at the S&P 500. So this is the white line, as you can see. So this is just really a reflection of the chart we were looking at just a short while ago, the peak that we had up here. And then this break of that level that we've had and the touch on the 2900. But what you can see here is going through the best part of 2017 and a little bit of a divergence, but generally so through the earlier part of the year. This is mapping then this on the blue line, the spread between US and global City Economic Surprise Index. So you can see the spread here, and what we're seeing is, is that economic data and US equity index performance was kind of going in step with one another. And what was leading really to one of the lowest volatility conditions that we'd seen in a long time when it came to the US equity market. Remember Q3, Q4, that was when we were seeing the VIX printing at the lowest level since kind of early '90s. Now that has shaken up, and certainly that's what's made 2018, at least from an intraday perspective, all the more tradable because volatility has returned after that lull. But what you're seeing here is quite a distinct divergence about economic expectations are now severely lagging that of equity valuations. So, you know, although corporate earnings, you could argue, have, have validated the kind of equity market up at these levels, the one thing is going forward though, if economic data continues to surprise to the downside, then this is going to be quite worrying for forward-looking sentiment and therefore investors' kind of confidence on how far this rally can really continue, particularly when we start getting to these psychological kind of milestones like 2900. I mean, it almost feels like if there's anything, if there's any strength left in this rally and if we're running on fumes, then, you know, you've got to think we've got to go to 3000 before people start asking some big questions. So things to just have a look out for. Big point though is that obviously the bigger play here is about China. So once we get over NAFTA, which is kind of a side order, the main dish is that certainly of China trade talks with the Americans. And Trump has been quite clear that it's not the right time for trade negotiations with China. He effectively said this when he made the announcement about Mexico. So after mid-level trade talks in Washington last week ended with no agreement, a person familiar with the discussion said Chinese officials had raised the prospect of suspending talks until after US congressional elections in November. So this is actually what's quite interesting. The fact that midterms are slowly creeping up on us, even with the NAFTA situation, one thing is here is that even if a comprehensive deal is reached including Canada, approval by all three countries basically through the legislation process is quite a tricky hurdle because US Congress is likely to vote at the earliest in what's kind of more informally known as a lame duck session of Congress after the midterm elections in November or next year, when it's possible that a Democratic majority will hold the reins of power. So although I think this NAFTA side of things is the latest kind of shot in the arm for market sentiment and it's helped to squeeze out new highs, I personally don't think it's going to be particularly long-lasting, because for it to be ratified and to go through, just given the close proximity now of the midterms, means that nothing from a legislative confirmation side of things is going to happen for a number of months. And obviously we know in the world of politics, without that kind of bottom line being inked and signed, a lot of things can change between now and then. So, um, looking at things, I think this trade— yeah, China stuff is kind of the real— the key things to look out for. And one thing I was looking at and reading this morning was that Quite an interesting article here by some analysts from Bloomberg, and they were looking at the fact that they've got basically a kind of collection of data that they look at as early indicators to ascertain the economic health of China. And what they're saying is, is that what we have been seeing factually in economic data from China is that things are slowly worsening. And so what they've got here are the The earliest indicators for China economy that the pace of expansion slowed for a fourth month in August, highlighting the pressure for the government to push through on its pro-growth policies. This isn't just about trade with the US, which is absolutely critical. This is also about a long-term play from China to have less kind of government intervention to prop the market up locally on the growth side of things if it is to fulfill its long-term ambition of encouraging foreign investment and being a global trade partner. But do they have that flexibility? And at this point, if economic conditions worsen, then, you know, something's got to give. And what we're looking at here is the overall activity broken down in its various different measurements. And sales manager sentiment, iron ore prices may be holding up slightly, but certainly this other area key property stocks, trade partner strengths, major onshore stocks and so on, is all tipping slightly then on the balance of continued weakening amid fears of trade war as policymakers unveil measures to boost infrastructure construction and credit to smaller firms, as well as tax cuts to try and mitigate some of this ongoing weakness. So this still is the bigger show in town. The NAFTA thing I think is short-lived in my opinion, but I guess looking at— we're going to have to, as we will in a second, look at the week in its entirety to really get a better feel for how this might play out. But looking short-term, this is the S&P here. So if we look on the daily continuation, the breach really of the key level long-term was that previous high at 2879. So really that's a key area down here, but that's a long way off from some of the current price action. More near term, you've got the kind of late Asia European entrance point of 97.5, then scaling down to the closing levels from the futures market before Asia came in and lifted it overnight, which was at 95. Then you got pivot at 92. So there's certainly some downside levels to keep an eye on that could support prices up at these elevated levels. S1 as well probably looks maybe the most appetizing as a strong level of support. You can see that area of consolidation that we had, uh, this would have been Monday's session. Before then, the eventual break higher came, and that lining up with that S1 on the daily pivots, uh, don't think we're going to get down that far today. I'd be looking— if we were looking at playing a range, let's say, maybe eyeing some of these more near-term levels as potentially entry points if you have the belief that the kind of rally is sustainable, at least to kind of, as I said, not punch higher dramatically but just to play that range. Okay, a few other things just to be aware of then from a news perspective. Here is Theresa May, so sticking to her guns at the moment. You can see May signals Brexit, no deal, no 'Not end of the world.' Premier's remarks contrast with gloomy outlook from Philip Hammond. You'll remember this isn't new, Philip Hammond being the Chancellor and obviously very aligned with his underlying kind of view based upon economics. And the economics is kind of fairly one-dimensional. You know, no deal is bad for the UK economy, at least in the, in the short term. And so him being downbeat is no surprise. But the key point here is that Theresa May, for the moment, continuing to say the UK can still make a success of Brexit if it tumbles out of the European Union without a deal. So, you know, you've got to not take too much of this on board. Certainly it's not moving the market this morning. This is kind of Theresa May's management politically, if you like, of those more minded of, you know, can— is she leaning too far soft, particularly the likes of BoJo potentially lining up in the future a challenge on her leadership, taking a more, a more striking hard Brexit stance than she's— I think you're definitely going to be hearing her making this type of comments because she's got to make sure that the public are on the side with her, that she's still going to deliver the democratic vote. At this point. Now, one interesting thing that I did see on this point is that Theresa May— now, from a UK political point of view, I think there's not too much risk of groundbreaking developments on the Brexit side because Theresa May is doing a tour of the African continent. So she's going to South Africa, Nigeria, and Kenya. I did see this tweet though, and I thought just to add a layer of context to Brexit, so She's on a tour of Africa, and this is a snapshot of what UK exports to these various countries. So the UK exports to South Africa, 4.4 billion, so by far the largest out of the three nations. In total, so all of Africa, 17.6 billion. Uh, just to put this into some kind of perspective, the UK exports to the EU, 243 billion. —so, you know, hence the reason why it's so important, this relationship with Europe. So, in other words, as this political correspondent is inferring, our exports to the 3 countries she's visiting this week are less than 3% of the value of exports to the EU. So, really inconsequential in comparison to that of Europe. So not trying to talk up the Remain game too much, but just stating the facts on the trade side. Looking at the chart though, on the cable price action, we've had a little bit of a move back higher just as UK and European participants have come in. Found a bit of resistance at the overnight Asia-Pac high, which was also yesterday's high print, kind of late UK afternoon. Uh, fairly light conditions as you would imagine on the UK bank holiday. So, uh, just finding here on that third test a bit of resistance running into it, a push back to 1.29. Longer term for the week, I mean, this is, uh, looking back through the last 2 years of price action, and what's been quite nice is that we've had this on the chart a while, this kind of multi-month trend line lower, the eventual break of which courtesy of the Liam Fox, the Trade Secretary, and that no-deal prospect saw the push lower. On the break back above it though, we have managed to form what I think could be really a period of consolidation for the pound. As I said, just given the political touring happening at the moment, I'm not expecting a great deal to happen in Brexit commentary. So the kind of area that I'm looking at for the week is really this price band between that 1.2783 in the futures and 1.2940 40. Any movement here out of these levels, obviously you've got to take into account the equation of the dollar as well. Any dollar weakness, because it has been on a continued downward trend at the back end of last week and was yesterday, then a break of 129.40 would open up the prospects then psychologically at the 130 handle, which you can see was that previous trend point on that touch that we had back on around the 19th of July would be quite key. And then you've got these previous kind of lows here, just above there, and the previous points of resistance here. If we broke above, which would be 1.3057, it's kind of near-term pretty strong levels of resistance, I would say, if we were looking at the pound for the week. Okay, a few other things. Let me just quickly bring up my other screen and we'll round off a few of the other news topics. This is one for any oil traders, just looking at Rouhani. So the president of Iran says the country will overcome newly imposed US measures against the country, he said, told a parliamentary session. Earlier today, vowing his government would defeat any Western plot against the Islamic Republic. So certainly from a supply disruption point of view, this is something kind of lingering in the background. I wouldn't say it's headline-sensitive to move the price of oil right now, but I think certainly it warrants measuring, or monitoring I should say, given Trump's aggressive nature with his commentary in the way of which Iranians have been responding with their comments so far. I think definitely this is something to keep in mind. Just looking at oil here, I mean, it's— after we have bounced quite nicely over the course of the last kind of 2 weeks from that run lower towards the $64 mark, I think we're quite fairly priced really for the fundamentals that are at play. I guess upside here, any retest on the high that we had last week's high was in— was in range. It's only about $0.50 off the current price activity. Then you got the $70 handle, which is kind of those previous highs that were seen back at the beginning of the month, which could be quite key on the upside, but not really too much to comment on, on, on that side of things. Okay. Gonna have a look at the daily calendar and then we'll look at the week ahead and a few points to be aware of, uh, for the calendar this morning. Coming up to 9 o'clock, uh, you've got Eurozone M3, Italian consumer confidence. So none of this is going to move the market. It's not really until we get into the afternoon where you've got the advance goods trade balance out of the US, wholesale inventories, Case-Shiller, US consumer confidence, Richmond Fed Services. Again, none of this I'm thinking is going to be particularly pivotal for market direction, so today could be fairly tame overall. Things to monitor of course would be any rhetoric from the US on the NAFTA side. One thing that we're going to have to navigate and could be one of the most volatile assets of the week could be the Canadian currency, because depending on how that unfolds you know that Trump's going to push a hard bargain, uh, and so I would be looking for potentially the CAD currency for those who like the volatility as potentially an instrument that could be quite interesting. So any flash comments on that? There is no schedule for the China trade stuff for this point in time, but obviously that's also critical. Just having a look for the week in its entirety, here it is. So going into Wednesday, we can start to see the various preliminaries, the second readings of GDP. So we get France, uh, the US will be obviously key, and we're going to get the oil inventory numbers as per usual on a Wednesday. So the API numbers coming out tonight, usual time, just after 9:30 London. Thursday, start to pick up a little bit of pace in terms of the frequency of releases. We get Spanish flash CPI, German unemployment change, UK data, that's really a non-event. Mortgage approvals and for money supply, uh, US personal spending income, core PCE price index. I mean, it's pretty light overall, nothing really here that's spectacular that I think would really spark a change in market sentiment of direction from the scheduled releases. From a geopolitical front, you've got informal meetings of EU defense ministers and EU foreign affairs ministers. But again, not expecting a great deal from that also. And then Friday, a couple of Chinese things certainly that could be interesting from the broader macro perspective, just given some of the discussions we just had about the ongoing kind of fear of, well, the severity of the slowdown amid the ongoing trade situation. So you've got Chinese manufacturing, non-manufacturing PMI that'll be ready for us when we come in on Friday morning. And then also the eurozone CPI flash estimate will be of some interest as well. So that's, that's pretty much it for the week. On a longer term perspective, I did see quite an interesting chart, and I'll share this predominantly more for the interns, because for you guys going forward, if you're going back to study, or certainly if you've got job interviews, this is quite a useful crib sheet to know of what's coming up from a major kind of event risks that need to be priced in into the market for the various different asset classes. And what we're looking at here are basically the Americas, Europe and the UK, and then Asia. So divided into these 3 different quartiles going out on the radar then would be the Q3 Q4, and then Q1. So it's quite nicely condensing a lot of information in quite a small space. So again, as I said, anyone— it's not just for the, obviously, the interns, for knowing about obviously forming views on the market, for the point of discussion with potential employers. I think for any of those in Trading Live, if you're trading more long-term, and holding positions, you know, in an instrument, let's say, over the medium to long term, then certainly you've got to factor in significant road humps that could come or materialize in these various different things. So for oil, for instance, you've got the OPEC meeting that's happening beginning of December. Obviously for Brexit, there's a lot of things going on. You've got September where you've got Parliament returning early Sep, then you've got the Brexit Labour conference, the Tory Party conference, autumn budget, questions about who's going to replace Carney going forward because his term ends in June of 2019. So lots to consider. It could be helpful. I'll share this in the trading live chat room as well. All right, that's it. I'll, I'll get a weekly strategy with some more kind of marked up technical charts for you, hopefully before midday. Otherwise, I wish you a good trading day ahead and, and good week ahead. I'll see you in the chat room. Thanks very much.