Morning Briefing - 30th July 2018

Okay, good morning guys. Looking forward to the week ahead. So we'll just cover off all the sort of highlights that we've got for the full week, uh, this morning. It's a packed week from a central bank perspective. We've still got obviously the, I guess, that kind of digestion of the social media speed bump from last week. Um, so we're gonna have a look through markets here. We just got oil a little bit on the upside as I speak. Stocks just kind of trying to edge to new highs having opened a little bit weak. But let's start by actually just looking at— before we get stuck into the charts and stuff, let's look at the week ahead, see what we've got on the agenda. Obviously we've trading through the final final days of July and heading into August. And this is what the data calendar highlights look like. Let me just actually— sorry, I just need to transition my screenshot. Here we go, now you can see. So yeah, this morning, I guess of all the days, probably today is the lightest in terms of key data. We do have though German, and we'll look at— we'll look at today's calendar in a bit more detail in a second. But through the morning, we're getting German regional state inflation figures, so that might keep things ticking over in terms of market price action. We've got UK mortgage approvals into the afternoon, just pending home sales, an Italian bond auction. Not so— this afternoon is looking a little light. I'll talk later about the portfolio management simulation that we're going to be running, so more details on that after the briefing. But certainly the remainder of the week looks pretty packed. So just keep an eye out because 2:30 AM tomorrow morning, we'll get, we'll get some key Chinese manufacturing and non-manufacturing figures. These will be the PMI readings for July. They'll be key. We got the Bank of Japan policy meeting ending. So their meeting begins today. It's a 2-day meeting and You know, you go back a couple of weeks and no one was really interested in it. But all of a sudden, rumors have been rife that maybe the Bank of Japan are going to be looking to tweak their current policy situation. So I'll talk about a little bit more about that in this briefing. But really, the key event for that will be tomorrow when they finish their meeting, they deliver their statement, and Kuroda will have a press conference. And we just want to see, are they going to change policy? And if so, how, looking particularly on their bond yield curve strategy, plus also their, well, their equity buying. I mean, they're buying ETFs at the moment as part of their QE program, so we want to see if they're going to tweak that or not. That has implications for not just for Japanese assets. We'll talk in this briefing about how the Japanese 10-year yield being pinned to to 0% has actually played a role in, in kind of suppressing yields internationally. And we'll talk specifically about the US 10-year yield curve and why hasn't it punched through 3%, and is it anything to do with the Japanese monetary policy stance? And if they alter that, you know, would that be the trigger for US 10-year yields pushing through 3% or not? So that's something to think about. We'll cover that in a bit more detail shortly. But yeah, just to finish on this, uh, this week, um, loads of data coming through on, on the Tuesday. Tuesday morning we'll have the CPI and GDP figures from the eurozone. We'll talk about— you will review again the US data that we had on Friday that was so punchy on the, on the US GDP front. And we'll have some inflationary data from the US on Tuesday as well with the PCE figures and the personal income and spending. We've got Chicago PMI, we've got consumer confidence It's all packed in here. And then on top of that, we've got the big, big earnings report of the season with the biggest company reporting their earnings, Apple, after the close on Tuesday. Obviously, some of these big FAANG stocks have been smashed. Of course, that's on the more social media side of things. Apple, not a social media stock, obviously. And so it'll be interesting to see what they deliver. But Pfizer, Procter Gamble as well. So some interesting, nice sort of diverse set of earnings from big guns across sectors after the close on Tuesday. Wednesday then, some minor UK data in the morning. We've got Japanese manufacturing and PMI figures. We've got the, the, the smaller sort of Chinese manufacturing PMI data, PMIs throughout Europe. Of course, this is the great thing of you know, the start of the month, because Wednesday will be the 1st of August. And so it's always that, those first few days of a calendar month where you're getting all the kind of punchy macro data come through. And so hopefully this will lead to a nice set, and, you know, updates on economic conditions in Europe, in the US. We'll get ADP employment, we'll get the ISM manufacturing figure itself, another round of the Department of Energy figures, of course, that have been so interesting over the last couple of weeks. So it's all packed in here for a very busy Wednesday session on the data front, as is Tuesday. On to Thursday then. Well, Bank of England will be perhaps potentially the highlight, potentially, as we've kind of got ever closer to this meeting. It does look like more and more that we are going to get a rate hike from the Bank of England, and we'll obviously cover this in huge detail on Thursday. But that'll be Thursday's highlight. But outside of that, you're still getting— and that Bank of England event is the big one in that it is Super Thursday. It's not only the rate decision, the Bank of England will be updating their inflation forecasts. So we'll get the quarterly inflation report. They'll be updating their GDP forecasts and so on. It'll be a Mark Carney press conference. So it's the full monty from the Bank of England Thursday lunchtime. And then Friday, if that wasn't a busy enough week already, we got payrolls to round things off, as well as ISM non-manufacturing data on the same day. So, and I'm sorry, all the services sector PMIs as well from Europe. So I mean, this, this week really is a tasty week, uh, licking your lips with anticipation. Huge amounts of data, huge amounts of monetary policy angles to think about. It's just today's the slow start, I would say, although these German inflation figures, you know, are important when thinking about anything ECB-related in terms of their, their exit strategy. So that's why this afternoon we're going to do a PM trader portfolio management simulation. So more on that later, right? So that's the lineup for the week. Definitely exciting, looking forward to it. If we have a look at the charts then, and actually before we look at the charts, let's, uh, let's just— because before you look at your charts, you know, a good part of the routine before you look at charts, because the problem is as soon as you switch on your charts, you're then locked in you know, thinking about price and, you know, you're kind of tempted into trades. What I would always do is make sure I've read my stuff on the macro side before I even begin to entertain the idea of doing some technical analysis and actually getting some trades on. So this is the front page of the FT this morning. Deutsche Bank looking to shift some euro clearing over to Frankfurt, which I guess is not a surprise. This is obviously Brexit related. We've had— look at the top left and we'll talk about this in a minute— but we've had German state of Saxony has delivered inflation figures that have ticked up to 2.2%. What else have we got here on the headlines? We've got Pakistan off the back of Imran Khan's victory last week. Now they're looking for a $12 billion IMF bailout. UK mid-caps suffering a drop in liquidity. This is actually a MiFID II-related hangover, it looks like, as research houses reduce the amount of research that they're producing on the mid and small cap stocks. Just because, of course, this research, they've got to sell it now. That— or I should say, from the client's point of view, the clients have got to buy it, they've got to pay for it. And so there's been a natural shift down in demand for this research, and so some houses have started to cut some of the research they do on some of the mid-caps. And this has led to actually a drop in liquidity on the exchange. That's the volume that's traded in these stocks. So, uh, quite an interesting— Mifid II, if you're into your regulatory, um, stuff, then that's a good article for you to read. Looking at the markets page itself, let me just flick over because I'd always read the headlines, what's on the front page. I then definitely, of course, move across and have a look at the, um, the markets section. Particularly, uh, this is talking about the central banks, and we'll talk about the Bank of Japan in a minute. Let's just click into this now, actually, because we've got, you know, a lot of stuff happening here on the central bank side. Now, the hot topic is the Bank of Japan, and actually we'll talk about it now whilst I've got this open. So this is the Bank of Japan's 10-year yield And I'm looking back over, well, yeah, what, about 6, 7 months here, back to December of last year. And what's happened last week is that the Bank of Japan's 10-year yield has popped up above 0.1%. Now, you might firstly be thinking, hang on, 0.1%, well, all right, that's basically zero. And it is basically zero. But the point is, on a relative basis, we've been trapped just above zero for a huge amount of time here with a range. You can see back at the start of the year, we hit 0.1 and that was the ceiling and we came off. And so we've had a break to a new high here. And this is in speculation that the Bank of Japan are going to change their policy. Now, their policy has been— and let me show you a longer-term chart actually for— because this is important. Doesn't matter if you don't trade Japanese assets. This is important actually globally. Let me show you their 10-year yield chart here on Trading Economics. And let me— I'm going to go back further in time here. Let me see. So this is the one month— sorry, this is the one week. This is the weekly chart. Let me make that a bit bigger. Bring that out of screen here. So this is the— this is looking back over a couple of years, okay? And it is 2 years ago that the Bank of Japan delivered a very innovative, brand new monetary policy strategy where they decided to actually focus their attention on fixing and anchoring the yield curve, essentially, and looking at pinning the 10-year yield at zero. Okay, so they announced this, um, back in 2016, and ever since then— and certainly we had a lot of volatility around the beginning part of that— but really for the last 18 months, so really from the start of 2017 till now, this yield has really been fixed, hovering between 0 and 0.1%. Okay, and whenever it gets up towards 0.1%, well, there's a natural barrier to it moving higher, and that barrier is the Central banks threat that they will anchor this yield at zero. And so therefore, if it— if the yield gets too high, well, then the Bank of Japan will come in and start buying 10-year bonds. That's, that's increasing demand. So the price will rise and the yield will drop back lower. So the Bank of Japan is keeping this down at zero. To be honest, most of it's been done by market forces. Rarely has the Bank of Japan actually had to actually get its checkbook out. Buy this stuff, but they did last week. They were forced into it because traders now think they may well scrap this 0% target, in which case of course yields are going to push higher. Now that does carry implications for Japan, of course. I mean, this yield is the highest it's been for 2 years now— more than that actually, uh, sorry, that's, that's a 2.5-year high this week for 10-year. Now if this thing, if they do release their their, um, policy of 0% yields on a 10-year, then this should lead to yields rising, which of course leads to borrowing costs getting higher. And, um, the Japanese government particularly, but also corporate Japan, have got a lot of exposure to that. So that's something. But I would say the more important thing isn't about Japan. I'm going to bring up the US 10-year yield now. It's not about Japan. I don't think necessarily. I think it's actually a lot to do with the US instead. Let me show you, because look what happened to 10-year yields in the US at the end of last week. They moved higher, back up towards this 3% handle. I'm going to go to a long time period like we did with the Japan one. So this is the— this is US yields. And you know, what's happened this year is that yields have finally broken higher up through that 2016, 2017 double top around about 2.6%, broke that and on up to 3%. And just for a period there in May, we had a couple of weeks where this yield was tracking above 3%. Then it kind of dipped lower. One of the reasons— and there's maybe a few— but one of the reasons why maybe 10-year yields didn't ever continue that upward trend is because of the Bank of Japan's policy. Is that relative yield thing. You know, if the Bank of Japan is still at zero, well, then this kind of makes US bond yields at 3% that much more attractive. So if you like, there's been a little bit extra international demand flow into US bonds because the relative yield difference between the US and Japan has been so huge. So you can pick up way more yield on US Treasuries than you could— than you can on JGBs. And so perhaps this has been one thing that's just kept a lid on US yields punching above 3%. If the Bank of Japan changed their policy— and we'll hear news on that tomorrow morning— if they do unpeg their 10-year yield, then not only will that lead to Japanese yields moving high, you may well get this 10-year moving up and making a new high for the year. Now, the reason why 3% is so important is because you go all the way back 2013 key top was at 3%. You go all the way back, you've really got to go back to 2011 to find the last time that US 10-year yields were above 3%. And when I go back even further, what you'll find— and we've spoken about this in the past— but, you know, what we've had on 10-year yields is a 30-year downtrend. Okay, and here it is on this picture now, a 30-year downtrend. And any sustained break above 3% now would definitely herald the end of this multi-decade drive to ever lower borrowing costs. And so the Bank of Japan might trigger some upside on US yields here, which might just set the cat amongst the pigeons for investors who are worried about just generally too much corporate debt on a global basis. That might lead to the US dollar appreciating in value. That will have implications for the emerging market space. So this is something to look for. This story on the Bank of Japan, it's not just about Japan, it's potentially the implications it might have on, on global markets. Okay, so it's an important event this week. We'll get news flow from that tomorrow morning. Okay, let's, let's look at the charts, see what's going on, and let's start with US equities. I know, like, the end of last week was was particularly interesting from a US equity point of view. We've been getting earnings season come through, and if you look at last week, generally for most of the week it was a very solid, nice sort of very positive sentiment, upward trending market off the back of what was some, you know, very strong earnings. Of course, you had the notable counter to that, which was Facebook's disaster. We'll have a look at the Facebook share price in a minute, but I won't cover that. You'll have been all over that last week. Of course, it was Twitter's turn on Friday to deliver a kind of the double blow on social media stocks last week. And so Twitter also dumping 20% in the same fashion that Facebook did. And this caused really a bit more of a sustained move to the downside for the index here. You know, it's all very well and good. You know, these— well, Facebook's such a monster company in terms of its size and its market cap. But, you know, we thought maybe that Facebook thing was an isolated situation just for Facebook. But Twitter's kind of just added to the concern that we've got maybe a social media overvaluation situation going on. Of course, we dumped lower on Friday despite the fact we had solid GDP figures. We'll talk about that as well in a minute. Um, you know, coming in at 4.2%, um, was— well, if you just think about it on a standalone basis, 4.2% is huge. I mean, check out— Danske Bank did a whole research report on this. If you're looking at their GDP chart here, 4.2% is massive and the best reading we'd had for 4 years. And the thing is, if you go back 4 years to 2014 and we had the Q2 at almost 5%. Q3 was up there as well. But what you got to understand about 2014 was Q1 was negative. So actually a lot of that— and that, and that was because of really bad weather conditions in Q1 of 2014. And so a lot of that economic activity that got prevented because of the weather got kind of pushed into Q2. So actually the really powerful GDP prints from 2014 was, was main— a lot to do with a snapback from a disastrous Q1. You can't say that about this year. Q1 this year was growth above 2%, so Q2 now to come in at 4.2%, this is huge, okay. You know, yeah, mainly fine, it's a Trump tax cut related situation with corporate profits punching above 20% annualized growth for the first time in, in a long time. So, you know, 4.2% is a massive figure. However, market expectations have got carried away with themselves. Which is often the case, of course. And some out there were expecting a 4.8% GDP print for Q2 in the US, and of course they didn't get it. And that coupled with Twitter and then, you know, adding on to the weight of the Facebook situation, and of course things came lower. And we then technically broke below that low that we had on the 24th, and this opened the door for some nice end-of-week profit taking. Because where are we? You've got to factor in, you know, where are we in the grand scheme of things here? And where we are is, is right up there. That's where we are. You know, big move over the last month to take this, this upward trend that we've had in place since April, to take it on and up for another extension to the upside. And of course, there's only one barrier left. This trend does continue. Yes, we've chopped back and pulled back here. End of last week on profit taking. Keep your eye out for that key top middle of March, key technical level at 2800. That might come into play this week. So be aware that 2800 is an important sort of medium-term level. I know we chopped through it a few times a couple of weeks back, but I do still think it's an important price point, important platform to work off as support this week. But there's only one barrier left, and that's the all-time ever high. That was set back end of January up at 2879. So, you know, we are just shy of the all-time high despite some risks. I mean, the earnings, yeah, they've been nice and strong and fine outside of Facebook and Twitter's hiccup. Generally, they've been very powerful. But we still do have things like trade war risk, which definitely doesn't need to be forgotten about. But yeah, I mean, so what's going to happen today? If I zoom back in on a shorter time period, we're just consolidating. Let me add the line, which was Friday's low. So that's an important one that kind of held as support just about overnight. We're trying to just track a little bit back higher now, but we're in consolidation mode after what was a steep, uh, profit taking at the end of last week. If we kind of take this thing more European and have a look at the DAX, Then the DAX this morning opened low. The Asian session was negative in a hangover from Friday's, you know, bad session on Wall Street. So most Asian indices were lower overnight. This led to the DAX just opening actually right on Friday's low and just about support found, and we just ticked up. We have been flirting with the pivot for the last couple of hours. And we have had some German inflation figures coming in from, from Saxony, and that's going to be the feature of the morning with German regional numbers. We've just had actually the Bavarian numbers as well that have come in, in line on the month on month at 0.2%, and the annualized figure was 2.2%, which was a bit lower than the 2.4% expected. We've had Hesse, that's another German region, They've delivered numbers slightly above expectations. So 0.4% on a monthly basis. Brandenburg was also at 0.4%, Saxony earlier on. So these German inflation numbers have been ticking in and it's just kind of maybe capped a little bit of that upside that we had going on. If you have a look at the euro, that's been nice and positive. So this is as we've been getting slightly hawkish ish, if anything slightly hawkish inflation figures here from Germany's regions. And this has seen the euro just push up through Friday's high, okay, which was a nice support area. If you look back earlier last week on the 24th of August— oh, sorry, July— and the 25th of July, I draw a couple of boxes in here, and that kind of shaped the resistance into the close Friday night. And we've just popped up through that, so keep an eye on that level. 17:06 on euro dollar, now support. Um, nice platform here, classic long opportunities potentially. Uh, we've got R1 which is for now capped the upside. Those of you who are fans of your Fibonacci, well, have a look at that Thursday to Friday range in terms of the sell-off because we've got the 38.2 fib in the mix here. But I'd say perhaps more interestingly, the 50% fib is nicely between R1 and R2. So that's another price point to look for if this upside preference here that we've got at the moment continues. And there's a couple of levels to keep an eye on on the way higher. If you have a look at cable, we kind of had a pretty decent positive correlation going on here with, with cable and the euro. Again, similarly, just pushed up through our— sorry, Friday's high, which is also our 1 for cable. So keep your eye on that. But I'd say, you know, euro should be slightly more positive than sterling here off the back of these, these mildly hawkish inflation numbers from Germany. Um, let's have a look at gold, because as the euro-dollar and cable have been pushing higher, that does of course mean we've got some slight dollar weakness, but gold's just finding it difficult around about the low point we had Friday morning. I know we then had a big sell-off and then a big reversal, but by the time we got to Friday's close, that, that level around $1,231 again sort of came in as support. And so it seems to have had— that's where we're trading now. So a little bit of resistance in here. We've got a great sort of double bottom from last week on gold. Down at $1,227. So that was with S1 was critical in just holding firm. Just below that, you've got the low of the year, which was set back on the 19th, of course. But gold's kind of trying to push higher off the bit of dollar weakness, but struggling a little bit. Let's just have a look at bonds and then we'll finish by looking at crude oil. T-notes here. Yeah. All right. Had a decent session on Friday afternoon as stocks were selling off. We had a bit of risk-off theme. So a bit of safe haven flow into T-notes here, but it didn't get very far, which again is thinking about that Japanese angle and, you know, prices remaining suppressed here as we think ahead to the Bank of Japan's decisions tomorrow. So T-notes here in the US had every opportunity to rally. The back of a very sharp downside on equity markets, but they didn't. I think that's quite telling. You know, when a market has got a great fundamental reason to have a big move and it does not, well then that indicates there's other influences, there's other forces at play. And I think for T-notes here, I do, I do believe the, the Bank of Japan's, you know, got US bond traders, that's their kind of key focus here. So keep an eye on this. I wouldn't be surprised if T-notes, um, just give back Friday's gains and we head down, maybe drift down and trend down towards Friday's low point. And if we have a look on a longer time period, on a daily, you know, Friday's low is that key low that we have from back in June. So you've got a very strong technical double bottom, June's low, July's low, both at 119.08. I Okay. Any move, any move through that. And that really does set up a technical break to drive to test the low of the year that was set back in May. And of course, this is price. So as price drops, this is yields punching higher. So any break of 1.1908 on price, any break to the downside will trigger a move back up through 3% on yields. And that will then get a little bit more interesting. So keep your eye on these prices. The June and the July double bottom for T-notes, technically very important. Okay, finally let's look at oil and I'll finish by just looking at the more detailed calendar for today's events. So here's crude oil. It has been positive this morning. We've broken up through the pivot level at $69 and haven't got very far yet, but up to $69.25. Let me just adjust so of these lines just to bring them into line with some of the price points that have been formed on Friday. So you got— if you look back Wednesday, Thursday, Friday, we got a bit of a double bottom at 68.26, nicely confirmed Friday when we had that big sell-off and then the bounce into the close. Um, if I draw the other line down here, the low from last week back down at 67.56. Now on the upside then, yeah, fine, last week's high at 60 $69.91, but really it's $70, which is that price of interest. You might say there's a, there's something in here around $69.70 as well before we get to $70. That's an important price. That was the high that we had back on the 25th, on the morning of the 26th, where kind of resistance around that point on Friday as well. So, um, you know, looking up, it's $69.70, it's $70. If we look at 4-hour chart, let's go back a bit further. Look at a 480-minute chart and we get to look at some other prices higher. And of course, well, I mean, the big ones are up at $73. But again, thinking about your, your fib levels, then the key thing about that 69.70 area, it is the 50% fib of the range that we've had for the last few weeks. So, you know, that will play a role, you know, as we punched up to set a high for the year, start of July, and then things kind of came tracking back lower. So the Fibs range for that sell-off, middle of July, 50% Fib at 6970. So something else to think about from a technical point of view. Of course, it'll be interesting to see what the energy— sorry, the Department of Energy numbers bring on Wednesday. We've had some punchy drawdowns in the last couple of weeks, um, to say the least. And yet oil hasn't quite managed to get back above $70. So, um, we've obviously had some flare-up on the Trump-Iran thing started last week, and that really didn't get things moving on the upside either. So oil kind of struggling here just below $70. So let's see. Uh, finally then, I'm going to just finish with the actual detailed timetable for today's session. We've had a lot, we've had most of these German inflation numbers, um, so that just leaves UK, um, consumer credit data at 9:30, but it's the Bank of England this week, so that's not really going to move much. Uh, we got mortgage lending and approvals figures, which will be interesting. We've definitely had weakness in the— well, certainly in the London housing market over the last few months. And so that should, should be seen here on the mortgage lending side in a negative way, of course. So we'll see what happens there. 10 o'clock, we've got some sentiment figures out of Europe, out of the EU, which aren't massively important. Um, and this afternoon we've got German inflation data, but actually that's not important either because we'll have had all of the regions report their inflation already. So by the time we get to this afternoon and actually the national German figure as a whole, we kind of already know. So that's why we— that really leaves this afternoon as pretty empty in terms of Tier 1 data. Just on the earnings front, down the bottom here, Caterpillar, perhaps the one big gun reporting from the US. Now that'll be interesting. That's quite a good sort of global bellwether stock. It Course, their business is global, their business is construction. That's always a kind of lead indicator, if you like, on the, let's say, global GDP forecasting. Caterpillar earnings can often be that good lead indicator as to how the health of things are generally from an economic point of view across the world. So lots of people, lots of macro traders do look towards Caterpillar earnings to get that kind of insight. Right, that's it then from me for the briefing. I'll be back on the mic as we go through the morning to talk about the portfolio management simulation we're going to run this afternoon. But first up, we've got UK data in 16 minutes. All right, thanks a lot.