Morning Briefing - 2nd August 2018

Okay guys, good morning. I hope you're well. Thursday, 2nd of August. Let's have a look what's going on here. Definitely a negative vibe to the start of today's session, and indeed through the Asian session when you're looking at the equity space. I'm just going to pull out and have a little closer look at the DAX here, looking on a 120-minute chart, and you can see the kind of pretty steep, um, large red candle featuring on the chart as I'm speaking. So nice kind of breakout to the downside here. We're trading back and maybe eyeing up this level from back on the 25th of July, down at 12,500— sorry, 12,524. Below that we've got the 20th of July low, down That would be below the 12,500 handle, of course. So weakness here on, uh, the European equity space. If you look at the US, then not as severe by any means, but definitely still negative. So you've got the S&P down on the lows, testing 2,800. We flirted with this price point earlier in the week, of course. And if I go to a a longer time period chart. Um, just give me one second whilst I set that up. My chart will work. Ah, there we go, it did work. Um, then actually I'm going to go further back. Let's go to daily chart because, um, you know, right, I guess this 2800 handle, we tested it on the 30th of July, we kind of flirted with it, and indeed did move below it on the 23rd and on the 20th. I mean, the other thing to think about is this level from back mid-June. So the mid-June top is key. It's maybe even a more important level. I was talking about this when we were testing it the other day, but I'd say anywhere but anything sort of 2790 to 2800 is a kind of zone of support now on the way back down. Any movement below 27 $1,690. And you know, that, that certainly would be technically negative and would see a move below that mid-June high. But, but for now, I mean, the, the losses we're seeing on the US side of things are less severe than we're seeing in Europe. And well, let's just talk about why this is probably happening. Let me switch up my screenshot and show you this headline from Bloomberg: Stocks slide as trade fears return, dollar climbs. So I'll show you the dollar in a minute because the other feature of the morning is certainly dollar strength. So we've got stock market weakness and dollar strength in tandem. This is more news on the trade war from the US side of things where Trump's and his team are now looking to entertain the idea of, you know, not only looking to slap further tariffs on another $200 billion worth of goods coming into the US from China because they're They're going through a consultation period on this now and are eyeing up potentially putting tariffs on further goods come, let's say, September time. But what's happened overnight is, I mean, the idea was that they were looking at a 10% tariff, potentially a 10% tariff on $200 billion worth of goods. Well, overnight, Trump and his team have said, actually, you know what, why are we messing about with 10%? Let's threaten 25%. So that's the news. The Trump administration are looking at tariffs on additional $200 billion worth of goods. We knew that, but now it's, right, let's ramp it to 25. Let's really put the pressure on the Chinese here. I think this is in response to what's happened with the Chinese currency. And let me just very quickly show you what I mean, because what's happened since the We already have tariffs, remember, at 25% on about $35 billion worth of goods. I'm just going to show you, um, what's happened to the Chinese currency's value in the last few weeks. So let's have a look here, because what's happened as we've tracked through the month of July here, and we've seen the currency's value drop. So when this market goes up, that's the dollar strengthening. And then it's the yuan devaluing. And here we are testing right up at 6.85. And if I take this out to a year to date, you can see the steepness of this. And so this actually reduces the negative impact on US tariffs. So if the yuan is devaluing, then the Chinese exporter who's selling the goods in dollars in the US, yes, now have a tariff. To deal with, but actually their currency devaluation is offsetting some of the negative impact there. So here's the Trump administration saying, well, hang on, you're, you're kind of getting around the back here. So this isn't playing fair. This is not, you know, delivering our agenda, which is trying to get China to the negotiating table to try and, you know, decide on a new fair trade agreement for both sides. And so Trump's decided to up the ante. Okay, which is not a surprise in any way and certainly is the pattern of things and how things have played out in, in recent months, obviously. So, but let's look back at the charts then. So the— well, actually, before I do look at my CQG charts, what's the response? I've got a chart here on the Chinese equity side of things. So the Hong Kong Hang Seng Index dropped sharply off the back of this development overnight. Obviously, we've been bearish anyway over the last month or so because of trade war risk. But the Hang Seng down to the lowest levels we've seen since September last year. Now, you also, also saw mainland China indices drop, and we're talking about drops of about 2.5% here for things like the Shanghai Composite. So definitely weakness on the Chinese equity side of things as a result of this uplift in, in trade war risk. So looking back, because it's not just equities that are taking a downturn here, check out your currency pairs. And definitely dollar strength is the theme of the morning. And let me zoom out a little bit. We also had the Fed last night. I want to show you on the euro dollar because this is important. We've got a key test of that low point that we had from last week. So we've had this trade war risk elevate. We've also had the Fed last night delivering their August monetary policy statement where they did as expected. There was a non-event really, in so much as they did not hike rates, but they continued to use language in the statement that certainly points towards the idea that they're going to hike rates at their next meeting in September. And then we're also looking for a further rate hike in December, and then we're looking for further rate hikes in March and in June next year. All right, we're now definitely on a once-a-quarter cycle. That's what markets expect. And that statement from last night does not change that expectation in any way. Okay. So really a bit of a non-event. It's the trade war risk elevation that's kind of moving things here. So look, euro-dollar down onto this key price point. So it's 1.1662. That was the low we had on the 27th of July, end of last week. If I zoom back and I'm going to go on a daily, actually, let's just, let's just see where we are in the grand scheme of things here because Obviously, we've had a big move on this currency pair in recent months with some significant dollar strength as we've seen the Fed become more hawkish, as the US data in terms of growth momentum has remained very solid and indeed accelerated, as inflationary pressures in the US begin to tick higher, as the jobs market continues to show you know, real strength. Well, of course, then the, um, our expectations on the steepness of the rate hiking cycle have increased, and this led to that dollar strength theme through mostly the month of May. We've been consolidating ever since. So on the downside, if we do get further dollar strength, well, firstly, it's that Friday low from last week, then it's about the, the low that we had mid-July, 19th of July at 1.1623. Any break of the 1.16 handle, I I'm not necessarily expecting that today, but let's say through this rest of this week, next week, based on what Trump's got to say for himself. Well, then, you know, the key level of the year is the low of the year, which is just shy of the 115 handle, down at 115.26. Okay, so certainly dollar strength is the theme across all FX pairs. I'm going to talk about cable specifically in a minute because, um, well, let's do it now actually. So cables are— or I should really be more specific, sterling is an important currency for today because of the big event which is going to be the Bank of England's monetary policy meeting and the culmination of that meeting. And more than that, it is, it is Super Thursday. So every, every other meeting, um, we get way more information and Mark Carney live press conference. So today we're going to get the full monty. We're going to get the rate decision where, remember, we're expecting a hike for the first time this year. We're also then looking for the usual stuff in terms of the vote count. And this is going to be important. And I'll go through the stats in a minute. We're going to get the statement and the minutes from the meeting. We're going to get updates to the Bank of England's GDP forecasts and their inflation forecasts. And then on top of all of that, we're going to get Mark Carney live press conference. All right, so this is the big event. It's going to start from midday. All the information is going to get dumped at midday, with then the Carney press conference coming, um, 12:45. All right, so this is the big event. Now at the moment, it's dollar strength that's the theme, and that's why cables made quite a key break here, new lows for the week, as this dollar strength track things lower, and this takes us below Friday's low as well. If we look slightly further out on a longer time period, then you've got some, you know, certainly some room to move lower before we get down to the key July low, which is right down just a whisker below the 130 handle. So, well, let's have a look at this Bank of England, um, stuff then. Um, let me transition my screenshot. So here he is, uh, the unreliable boyfriend, Mr. Mr. Carney. So he's going to be talking to us today. Um, let's look at some stats here because what's important about this— let me— this is good graphic. This is something IENG produced, which they're always pretty good at their infographics, and you know, always a good source of information ahead of macro events, or certainly on the monetary policy side. So here they're looking at two currency pairs. This is all about how is the pound's value going to get impacted by the Bank of England today. So we're looking at the pound against the dollar and then the euro pound. And what ING are talking about, which is right, and what we should always think about is, you know, don't forget we're expecting a rate hike. All right, so it's How hawkish is the rate hike or how dovish is the rate hike? Because we're definitely getting a hike. Well, let me just very quickly talk about the, the most amazing event of the day would be no hike, and that would be a radical outcome, incredibly low probability outcome that would therefore lead to an incredibly large move in markets with the value of the pound collapsing. So here, ING is speculating 1.2850 off the back of a no hike. Let me just show you how dramatic that would be. If you look at a daily chart, and I agree with them, I think 1.2850 would see a break of that 2018 low and we'd be moving down to where I've drawn the line there. And the last time we were trading 1.2850, I've really got to go on a weekly timeframe here. 128.50, we last saw that, yeah, a year ago. You got to go back to August 2017. Okay, um, but 128.50 would be a move of, yeah, 250 pips, which isn't that much when you think about how dramatic that outcome would be, because, um, obviously the Bank of England have shaped our expectations that a hike is coming. So let's assume they're going to hike, right? So it really then comes down to, well, how hawkish is that hike? And the way we're mostly going to be measuring that is by looking at the vote count, because remember, there's 9 people on the Bank of England's Monetary Policy Committee, and we'll have— they each get one vote, and the majority rules. It's simple. Do you want to hike? Do you not want to hike? I guess in theory, on the table is the option, do you want to cut as well? Not that anybody's going to go for that, But what will happen is, let's say all 9 of them vote for a hike. Well, that would then be seen as hawkish. That means that not only are we getting a hike today, but actually we should be expecting perhaps more rate hikes in the near term. It might be 8-1. This is where 8 vote for a hike and you get 1 dissenter. So that means 1 of the 9 say, nope, I don't agree. I don't think we should hike rates. My vote is no hike. In that case, of course, you got a part of the committee that are skeptical about even one rate hike, never mind more. But the most dovish outcome of all would be 6-3, or I guess you could have 5-4. But knowing the members of this committee, most likely the most dovish outcome would be 6-3. That's where a whole 3 members of the committee say, nope, we don't agree. That definitely means that this would be almost like one hike and then done. So it's more about the future, you know, how does the pound behave today. It's not about the rate hike, which is almost certainly going to come. It's about guidance as to whether they're going to be more rate hikes in the near term. So they've got a range here. ING think that the cable can, off the hawkish outcome, can get to 132.50, which would be 150 pips move higher from where we are now, and a 128.50 on the downside off no hike. So that's more of a reaction to the downside than the upside. And that is because of the fact that, you know, ultimately, whilst monetary policy is one thing and of course has a big influence on exchange rates, unfortunately for the UK at the moment, it's the political risk that's the bigger influencer. And as you've seen in recent weeks and months, the pound has devalued again off the back of this idea that there's more chance of a no Brexit as Theresa May muddling-through approach and the fractured nature of the Conservative Party have made progress almost impossible. Okay, so that's a graphic to look at how the pound might behave. If we zoom down, there's a couple of other graphics here just looking about rate hike expectations. So bottom dashed line is one rate hike. So we're now expecting, um, the latest as of July we're definitely now expecting a, um, uh, an interest rate hike to be delivered today. Okay, in terms of two rate hikes though, and that's the important thing because as I said, how's the pound gonna change value today? It'll be based on, well, when's the next hike gonna be? And right now expectations are that the next hike won't be until November 2019. So it's like one hike, then let's just get through this Brexit stuff, get past that March 2019 Brexit date. Let's assess the kind of carnage that follows, if there is any. And right, fine, maybe then look at raising rates again at the end of next year. So that second rate hike is currently right out there, not until November 2019. If you get a 9-nil today, all 9 members vote for a hike, they then this expectation is going to move down on this chart, i.e., you're going to get more of an expectation of an earlier second rate hike. Okay, but let's have a look at the economics of all of this because why are the Bank of England hiking? Um, and let me switch up my screenshot actually at this point because let's look, well, look at the GDP situation. Well, we're expecting Q2 growth to accelerate from what was a really weak Q1. All right, so this is the economy growing at 0.4% in Q2, taking us back to the levels we saw Q3, Q4 last year. But of course, this is way off some of those peaks we had in 2016 and 2015 when the economy was, was on fire. So growth is expected to improve slightly, but it is only slightly. If we go down, what about, um, how does that compare to other economies? Well, UK was the only G7 nation to see slowing GDP growth in 2017. So our economy's trajectory is definitely on the downside. So momentum is slowing, which is not ideal for the Bank of England to start raising rates, of course. Well, what about inflation? Well, here the inflation situation is also now trending lower. I mean, I think if the Bank of England wanted to hike, then it was end of last year was your hiking opportunity. This is where inflation was elevated, where growth was still actually okay, but now growth has slipped and inflation's dropping and political Brexit risk has increased. So I think this rate hike now, the timing of it is questionable. I think if you just look at the UK economics and the UK political situation, then the timing of a rate hike today is questionable. However, step back from that you've got to think about the relative monetary policy situation because actually we've got hawkish Fed, they're hiking and continuing to hike. The ECB are turning more hawkish. I mean, even the Bank of Japan— and we'll look at Japanese yields in a minute— even they've had a very slight hawkish twist. And so it's almost like now, um, being neutral is like super dovish. So I think if the Bank of England want to avoid stirling's value dropping further, then actually it's almost like you've got to hike just to kind of be, be neutral now. So I think there is an argument then, therefore, on that basis— forget about the economics and the political risks, it's more about relative monetary policy. And I do also think that ultimately when you're considering where central bank interest rates are— and let me just finish on this Bank of England section by showing you the UK's interest rate chart. If you consider where interest rates are, well, they're still on the floor here at almost zero. And some are expecting a recession in the UK in 2019. And if that's the case, well, there's nothing— no ammunition here from the Bank of England to deal with that. So you could argue one reason to hike, and a good one, is to actually start to build up some ammunition so that you can cut rates again should the recession be forthcoming post-Brexit. So certainly a big event. This will be this afternoon, starting at midday with the vote count, the rate decision and the rest of it, the minutes, the updated forecasts of GDP and inflation. And then we're going to hear from the country's most unfaithful boyfriend, Mark Carney, at 12:45. Okay, I said Japanese bond yields because the other interesting thing that happened overnight, Japanese bond yields have spiked higher again. I was talking about this earlier on in the week. This is off that Bank of Japan meeting. So we spiked new highs for, for the year here. And I just look— sorry, looking around. Yeah. So up above the 0.1 handle and we're maybe going to see this rise to maybe the 0.2 handle. And this is really traders testing the Bank of Japan's resolve to kind of keep this yield anchored around zero. How did that have an impact on the US 10-year yield? Yes, we had the Fed statement, but, you know, come on, it was basically in line. I'd say this move higher on US yields yesterday was more to do with correlated moves with Japanese 10-year yields. And the interesting thing was the 10-year yield edged back above 3%. And so we go to a longer term. This is the first time we've been above 3% since May. And back in May, we hit a 4-year high when we got to 3.1%. So yields back above 3%, which, yes, is about Japanese, Japanese yields lifting. It's also about more supply coming from the US Treasury as the Trump administration borrow more money than we were expecting. So more supply, prices drop, yields go up. Hawkish Fed, you know, yields go up. And so, you know, you want to watch this 3% handle as we move into next week. Okay, so I've covered Trump tariffs, I've covered the Fed, I've covered yields, we've covered the Bank of England. Let's just update you, final sort of chart here with regards to data from yesterday because we've got a Big event tomorrow as well in the shape of the US labor market report. And yesterday we had a nice strong number on private sector job creation with the ADP employment number coming in above expectation at 219,000, best reading since February. So that's nice and solid and continues this theme of strong US data, more Fed rate hikes, uh, and so on. The other thing yesterday Gold demand slumps to lowest levels since 2009, according to a report. Um, I mean, this is— and if I show you the gold chart, I mean, gold tipped lower, uh, yesterday. And I'm gonna go to a daily chart because we almost got to this key low. You've got to be aware of this level, which is the low we had on July 19th, down at 1210. Um, so what's happened is that we've We're right down around— this is if I go to a weekly chart, this is the lowest levels gold have traded since middle of 2017. And the key, key level is really the $1,200 handle, which just about propped things up in 2017. So gold's been on a very steep decline. Hawkish Fed, strong dollar. And, you know, as that dollar strength's come through again this morning, as the Fed continues to point towards more hawkishness, then, you know, the dollar— perhaps gold is going to make that move to $1,200. But also, to make matters worse, or as a result of that, you see demand for gold dropping. And this is helping with that slide. So getting headlines in the press now about slumping gold demand, which of course never helps. Finally, just look at oil. So oil had a negative session. In the box there, you can see the reaction that we had on Tuesday night. Than the reaction we had yesterday afternoon off the back of the Department of Energy numbers where we saw a surprise increase in crude supply. And so oil's on the back foot here. And if I show you on a longer time period chart, let's go to it. Let's go to a 4-hour chart. Then you can see we haven't been down in the 67s since the middle of— well, let's say 23rd, 24th of July. Okay, so oil under pressure. The dollar strength situation isn't helping that, of course. So keep your eye on that. Definitely a negative vibe for crude oil, a negative vibe for stocks because of tariff risk, a negative vibe for a lot of these currency pairs because of dollar strength. So that's the theme and the shape of the morning. The big events coming at midday with the Bank of England. We'll be back on the mic for a full preview ahead of that. But for now, um, that is it. Actually, I haven't shown you the data calendar, and then I promise I will stop. Here is the data calendar. And actually, apart from that Bank of England event, we do have 9:30 data out of the UK, construction PMI. Other than that, it's not a great session for data. Um, even this afternoon, there's, there seems to be a lot there, but none of it's that important. So really, it's UK 9:30 construction data, then the Bank of England is absolutely the big event. In terms of earnings today, less of interest, more outside. Barclays delivered good earnings earlier, actually had some good earnings from European banks recently. We've got a lot of European numbers that have been delivered already. SocGen had some good earnings in there, but this afternoon from the US, Berkshire Hathaway, Dow DuPont, But really, those big giant tech stocks have delivered now in terms of their earnings, and so that was the big theme of the season, right? That's it, uh, enjoy your session, guys, and that's the briefing wrapped. Thanks a lot.