Morning Briefing - 2nd July 2018

I age. Okay, very good morning. It is Monday the 2nd of July. I hope everyone is well. I hope you've enjoyed the variety of sport on offer this weekend. But just having a look at the trading week ahead, and we've started off with a bit of a risk-off tone. Equity markets, as you know, looking at the charts, seeing a bit of a gap low in European equities. It's following negative sessions that occurred overnight in the Asia-Pacific region. US index futures following suit, supporting the US 10-year, which is up about 5.5 ticks. Bunds up 17. If anything, you've kind of got that continuation of a bit of a flight to quality in the FX markets, in the dollar, which is up now about a third of 1%. So gold also lower at this point, about $5, just under $1,250. Major pairs, currency pairs in the top left-hand corner. You can see just more recently, although, uh, were elevated overnight, they've just generally drifted lower with some of the fairly consistent dollar strength. And so just below pivot now in the euro cable, sitting at around that mark at the moment, which is the 132 handle. So, um, before I get underway of looking at the reasons behind this. And you've probably seen already, I shared this in the chat room. I'll continue doing this every Monday as well, but this is your full week ahead. So the main events for this week, this is inclusive of all of the major economic data, kind of governors of the various central banks if there is any speaking, like Mark Carney is this Thursday, he is on there. But then also you get Speaker events. So notably for this week, of course, trade wars very much in focus. One of the main reasons why you're getting this negative reaction this morning is because of European retaliation to Trump's tariff proposals, which we're going to have a look at in a second. But on the, the Trump tariff side of things, I'd say that's going to be still the predominant theme that's going to be driving day-to-day market sentiment. One consideration, of course, for this week is that trading volumes are likely going to be materially lower given that it is US Independence Day on Wednesday. That means that early market closures for the US on Tuesday, there's no trade there on Wednesday, and it's not surprising to see a lot of North American participants actually still on holiday today and Tuesday. They just kind of take off the entire first half of the week, extension of the weekend through, um, 4th of July. And then coming back into the end of the week, you get the kind of main crux of the, the data, all the jobs numbers, ADP included. So that's been bumped to Thursday, leading on into non-farm payrolls on Friday. But the key you'll see down here at the bottom is that on Friday couple of things. From a UK cabinet point of view, you get a key meeting on Brexit. This obviously is quite a key one, just given the lack of progression that has been seen thus far following the EU summit last week. And then you've got US import tariffs are put in place on the $34 billion of Chinese goods. That actually comes into effect on Friday, 6th of July, at the same time US Secretary of State Pompeo is in Pyongyang following up that summit between Trump and Kim Jong-un. So actually a lot going on. Not even mention the global PMIs and the FOMC minutes, which is also coming, which we'll get to in a second. So first off, let's talk about the news and the kind of risk off this morning is being triggered by a focus back to really Europe, but Half of the story, as I just mentioned, does include the global trade tariff kind of narrative. This comes after Donald Trump's threat to hit car imports with punitive tariffs risks sparking global retaliation against as much as $300 billion of US products, Brussels has warned. This accounts, if you're looking at the eurozone, for about roughly 19% of US goods exports in 2017. The warning is the first time the European Commission has, in a written submission to the US Department of Commerce, has set out a detailed response to Mr Trump's threat to slam punitive tariffs on imported vehicles. This comes after at the weekend Trump said on Sunday that the EU was, quote, "as bad as China" when it comes to the way European countries traded with the US. If you remember that infographic that we had looked at before, which was about this tit-for-tat escalation, if you like, what had been very much isolated to just really the US and China, the market seemed to have been relatively calm with that state of play. This though, what's happened over the weekend and from the market open this morning, is we've gone to the next level because now one of the biggest marketplaces in the world, that being Europe, the single market, is now retaliating with numbers that would be considerably large when it comes to US exports. Roughly one-fifth, one-fifth of all US exports go to, to Europe in that sense. So this is particularly interesting for that sense of this again ramping up to the, the next level. And so hence we've had a bit of a negative open to proceedings. Layering over this is the ongoing political situation developing in Germany. This was a bit of a talking point at the end of last week because we saw, if you remember, the euro shot higher after that EU agreement in Brussels about the migrant issue. Angela Merkel managing to get a deal and compromise over the line irrespective of some of the views from other countries, particularly the likes of her coalition partner, but also countries like Italy, for example. But what we've seen over the weekend is this headline where Horst Seehofer, the German Interior Minister, has set Angela Merkel an ultimatum, saying he would resign unless the Chancellor acceded to his demands for tougher controls on the German border. To give you a bit of context and the reason why this is such a a potential risk for the markets is because the CSU and the CDU is a union that has formed the bedrock of German politics for nearly 70— 7-0— years. So it's been a team that has performed extremely well and over a consistent period of a long length of time, and hence the breakdown or risk of a breakdown of it is is what's making markets pretty nervous. And this, of course, comes after Merkel's coalition government has only been going for about 3 months now. German media have said that this weekend, they said Mr. Seehofer had told participants of his party's meeting that there's basically 3 options that he's considering. One is that the party bow to Merkel's asylum policy. Or another, that he ordered tougher controls on the border knowing that he would blow up the CDU-CSU alliance, or finally, he would just resign as party chief and minister. And he said he had chosen the third option, which is where this commentary then has come from. Now, I found some infographics here that I thought might just help explain the situation a little bit about why particular the CSU party is so strong-minded on this idea of immigration. And so what I've got here is a main migrant route that is taken predominantly from Syria, en route then through various different countries, i.e., via Turkey, Greece, Serbia, Hungary, Austria, all the way into then coming through the southeastern border of Germany. So as you can see, the passage here takes you through this particular point of where the country borders between Austria and then going into what would be the nearest largest city, would be Munich. Now, as you can see then, this is the distribution of asylum seekers in Germany, and apart from Nordrhein-Westfalia, situated on the western side of the German kind of regions, The next largest by far, and actually one of the largest by land mass, and that particular area where the influx of asylum seekers is coming from with the passage of Syrian refugees, is of course Bavaria, which is down here. About 15.3% are coming from that area alone. And so the problem that Merkel has is that Seehofer is the leader and of that particular regional government of which her then government is formed on. And hence the reason why he is putting such a strong stance on this particular issue of immigration. So hopefully that just makes a bit more sense of why this is such an important thing. But with this, threats of a German breakup, in addition to retaliation from Europe, heightening trade war rhetoric, rhetoric as mean we've got a risk-off tone to the morning. European equities have stabilized a touch but remain heavy. I'm just looking at the, the DAX future here, looking on a daily chart. I mean, you've got— well, look at the 30-minute candlestick for the moment. This brings into context the low points, the weekly lows from last week. We had that double bottom, so we found a bit of a floor around there at the moment, but any retest, that would need watching. Because on a daily chart then that any break of that level opens up certainly the 12,000 handle on the downside, and then next points of support not coming in till quite a bit further lower in that respect. US futures, as we mentioned, already under a bit of pressure, just having a test here in the S&P down at the S2 already, which brings in the low from what would have been Thursday's session, um, 2693.75. And on a daily chart, I was just looking at that kind of trend line from May up until through June, July of where we were. So quite a key technical area that we're trading at the moment at around this 2700 mark. Any breach of that then might open up an extension to the downside and beyond around 2675 as a, as a potential target. As I said then, T-notes already haven't taken out R2 on the upside. Following this negative sentiment, you've also had Chinese equities remain under pressure. So we've been focusing on Europe, but obviously the, the import tariffs on Chinese goods comes into effect on July 6th, which is this Friday. So you can be sure we, we're going to get more commentary not only from Trump but probably from the Chinese as we go through this week. and Chinese markets have continued to remain under pressure. So this is a graphic of the Shanghai and Shenzhen share index, and it's continued to remain heavy. It does come as well with the global PMIs which are coming out to kick off this month and beginning of the quarter, and the Chinese one overnight was slightly disappointing. So yeah, the PMIs coming out as I'm speaking. I'll keep you informed. We've just had Italy come out slightly higher than expected, but we'll keep an eye on those as they, they drip through, through the morning. So going back then briefly to the calendar for today, and then I'll recap the calendar for the week. In terms of today, as I said, you've got the, the various European manufacturing PMIs, but you've got the UK one coming out 9:30. And then US, you're going to get the ISM Manufacturing at 3 o'clock, which is probably the main one. The market one is kind of second tier to the ISM release in terms of potential market impact. ECB speakers, Prayat speaking at 2:30 at the cash equity open as well. Two other stories just quickly from the weekend. This is one, as I mentioned on the weekly schedule. You've got Theresa May speaking with her cabinet. That's not going to happen though until Friday, so I would say Brexit talk is a side order at this point, not the main course, which is definitely the trade war situation. You can expect probably though various newspaper leaks and updates coming out probably on Thursday going into Friday, and then most likely the weekend is when you'll hear the outcome of some some of these discussions on the customs union and the Irish border, so on and so forth. Another headline you may have read as well over the weekend was Donald Trump. Not only has he been calling out Europe on the trade front, he's also been saying— he tweeted along the lines of, "Had a great conversation with Saudi Arabia. They're going to increase output by 2 million." He agreed. Great job, Saudi. The only thing is Saudi responded and said, we didn't say that, Donald, that's not what we talked about. And so oil actually did gap lower a decent amount overnight in that respect. I mean, if we just bring over the oil chart for a second, so obviously Trump's call for 2 million is way larger than what OPEC managed to get over the line. And actually what OPEC is able to do, given a lot of the countries, for, for various different reasons, a lot of them politically, like Venezuela, disruptions to their network and systems that they just cannot pump anymore. What Saudi actually said was that the discussion with Trump is that they have the ability to add 2 million if they were operating at their maximum capacity. But I think Donald's just ran with it and gone Saudis have agreed for a 2 million increase. So to be clear, this isn't— is not what's happening, because one of the key things here, of course, is that if Saudi were to increase by 2 million, this is the opposite of what Iran wants. And this only then makes the division between Saudi Iran even more, uh, you know, the divergence and gap even wider. And so, yeah, not exactly the best diplomacy, I'd say, shown for that particular Gulf region, with already the fairly fragile nature of the Saudi-Iran relationship. Not forgetting as well that US President Donald Trump, he, he has— and his stance has been for a while— that actually he wants oil trading at $25. That's what he wants. So, you know, if you want to read through the politics of the headline, this is what it's about, is because we're going into driving season, it's the Fourth of July, and just a few months ago oil in the US, or gasoline, was trading above $3. Now this is quite destabilizing from a political point of view for him domestically, trying to appease the consumer, of which we know he's definitely in the game of doing. But again, just to be clear, there has not been any kind of agreement here. This is just purely Trump getting the wrong end of the stick more than anything than the Saudis have agreed to. So the OPEC deal remains as it is. But if anything, I would probably be keeping an eye out for the likes of what have Iran got to say about this, because this would definitely I would say get their backup on the situation and heighten tensions with the Saudi relationship and what their relationship is with the US. Because don't forget, the US should have absolutely no say of what OPEC does. Whether or not that holds true is yet to be seen. But looking at the oil market, it did gap down in reaction to some of the commentary, but I don't think that's that surprising because Remember, if we put oil on a daily continuation, we got up to trading the highest levels we had been last week since November of 2014. So after getting up, breaching that level and getting towards close, about 50 cents off a $75 handle, we've pulled back basically to that point of technical resistance, now turned kind of a support zone. So yeah, I'd say the same rules apply for oil, and I wouldn't be reading too much into that Trump comment, uh, in all honesty. Okay, just quickly back then to the, uh, that graphic for the week ahead, because I just wanted to mention as well a few other key things what are coming out, and then we'll wrap things up. Looking out for the PMIs. So back to the, back to the table. So We do have the Iranian president, Rouhani, is in Switzerland and Austria discussing the nuclear deal. So quite nicely timed then. If you're looking for Iranian response to some of the commentary at the weekend, it's going to be potentially forthcoming throughout today's session, Tuesday and Wednesday, as they discuss that nuclear deal. Tuesday, so this is overnight tonight, we'll get the RBA interest rate decision, and then Wednesday is the market closure for the US. So again, during the Fourth of July, markets particularly quiet. So for any of the newer traders, you for sure have to factor this in in terms of your trading strategies and market movement. It typically means things are incredibly quiet and range-bound. However, given the lack of participants in the market, if there was a, a steep escalation in the trade war situation, for instance, given the lack of participants, it could equate to quite exacerbated price movement if, that is, the right type of news did occur, because more often than not it's very quiet when the US are on their kind of main holiday of the year. Coming back in though, Thursday then, it really picks up pace. You get ADP employment change, you get the US ISM non-manufacturing number, the oil inventories are on Thursday. Counting for the holiday. Then you get the FOMC minutes on Thursday evening. Now these ones actually could be very interesting because if you remember, it was the last Fed meeting that was very key because they had the update to the Summary of Economic Projections and they took the number of rate hikes for 2018 from 3 to 4. So there was a slight subtle change in the dot plots for 2018 and the subsequent years thereafter. and it will be very interesting to see what the type of the kind of balance of discussion was amongst those members. So it could be quite an interesting one. That's going to be on Thursday, Thursday night. And then you've got Friday where you've got non-farm payrolls. My thoughts on non-farm payrolls are the same they have been for a number of months now, in that non-farm payrolls really is not important in respect to the number of jobs created. It would be unsurprising to hear another number of kind of 180,000 to 200,000. It's the wage number, of course, which we'll continue to look at with great interest. And then, as I mentioned before, you've got the trade— US import tariffs put in place on those Chinese goods coming into effect on Friday. So between now and then, I'm pretty sure that China is going to have something to say about that. All right, that is it. It's your brief. Hope you're up to speed. Um, Sam will be back later, so if anyone want to talk technicals as well, he'll be on hand to do so. The weekly strategy, I'll get working on that this morning, so that should be out in your inbox with a few more thoughts in detail with associated charts and setups for the week ahead. I'll look to issue that midday. Otherwise, have a good one and have a good week ahead. Thanks, guys.