Morning Briefing - 3rd August 2018

Okay, good morning. Welcome to Friday, 3rd of August, first, first Friday of the month. And so of course we get non-farm payrolls, which I will talk about today very briefly. I'll be doing a much more in-depth non-farm payrolls preview as we get closer to the time. So really, and from, from 12:30 onwards, I'll be doing non-farm payroll previews. Main thing to talk about yesterday, of course, though, is the pound and what happened with the Bank of England. So that's where I'm going to start. And it's pretty difficult one to trade, to be honest. I was, uh, here with the guys in the trading floor when this data came out, and if I go back to a shorter term chart, you can see an initial very bullish reaction on the 9-0 vote, obviously on the hike. There was a slight chance that that hike wasn't going to happen. It did. We pushed towards— I'm through the pivot level all the way up to R1. And on the whole, for me, the commentary that went along with that hike, I felt, was pretty hawkish. So here I was talking to some of the trainees just saying, let's just, just go along the pound, we'll, we'll get through the pivot. And we did go back up towards the pivot after that initial release, certainly offering— you know, this is why scaling out at levels is so important— certainly offering a chance for scaling out of some of the trade if you were looking for the pivot. But actually, the lackluster nature of the pound bulls was evident, and there was reason for it because As we went through into the day and we got into the press conference, really Draghi disappointed any pound bulls. So just to, just to put it into context, this is only the second rate hike since the financial crisis 10 years ago. This is only the second time rates have moved higher. Of course it was priced in. Um, the one variable was the 9-0 in terms of the vote, um, and that was hawkish, the 9-0. And some of the Commentary on the data release was also hawkish. But actually, really, what's happened with the euro, with the pound, I think Sam posted something that was quite interesting about what happened the last time we had a rate hike. And after last time we had a rate hike, we did move lower before then continuing to move higher. But I think— I do think that story has had a lot to do with what the dollar has been doing. Rather than necessarily what, what the pound has been doing. I think if you really want to see what the pound has been doing, have a look at the euro versus the pound. The code for the euro versus the pound on your CQG is EB. EB is the euro versus the pound. And actually, going back over almost a year now, we've been ranging between 87 and 89 pence in the euro. So to be honest, in terms of what the pound has been doing, it's not actually been particularly volatile. I think it's much more to do with the dollar over recent weeks. However, having said that, what was interesting about what Mark Carney said— one second please, Deacon, close the door. What was interesting about what Mark Carney said was his absolute clarity on the fact that this was not going to be a series of rate hikes like we're seeing in the US. Um, this was, this was pretty much as good as it gets in the UK. This is, this is what disappoints me a bit about the UK and, and why now I am bearish the pound. And it's actually not necessarily to do with Brexit, although just now Mark Carney has said that there's a high chance of a no-deal Brexit. The probability of a no-deal Brexit is uncomfortably high, and it's on that news that we're moving lower right now. But the big concern for me about the pound and the UK economy is that actually, because of low productivity levels, really this is about as good as it gets. Now, what that means is that, you know, growth expectations are supposed to be about 1.5% in, in the UK in order to, in order to, uh, mitigate inflation concerns. We've got growth at 0.7— we've got growth at 0.75%. Um, why is this, why is this so low, and why is Carney talking about it in this way? Well, it's really to do, due to do with low productivity. Low productivity in the UK, which we've seen for quite a long time, means that If we do start to see wage-price inflation, then that's not reflective of higher productivity growth, which means that really that needs to move into prices, which means that inflation— if we start to grow above 1.5%, 1.75%, then actually there isn't enough productivity growth in order to absorb wage-price inflation. At the same time, when we're seeing growth of over 4% in the US, this is, this is to me relative medium term quite disappointing outlook for the UK. Carney's obviously very bearish on the whole no-deal Brexit outlook as well. I'm not on with him on that. I think there will be a fudge. One thing I've learned about the EU over the last decade since its inception is they, they know how to do a good fudge. In order to, to just get over the line and make everybody about as averagely happy as possible. So that was the Brexit news, or I should say, sorry, the BoE news. The pound is trading on really important levels, guys. This— these are the lows for the whole of the year, just below the 1.30 handle. The pound has not been lower. We've got this just touch lower here on the 19th of July where we hit a low of 1.2988. It very much looks like to me we're gonna get through that. And if we do get through that, where's the next kind of target that we'll be looking for? And that has to really be the 128 handle, which comes in as the low that we saw 2017, this time last year. So in terms of a technical pattern, you know, this is a lovely double top, isn't it? Double top, head and shoulders, and we're gonna come and complete this pattern coming down to the 128 handle. In my opinion, especially if we continue to get dollar strength. You know, this, this move in the pound, as I've shown you in its comparison about the euro, so far has been more about the dollar than about the pound. But now, given the— it could not have been more of a dovish hike, uh, in terms of the commentary. Um, I think, I think the pound's going to stay underweight. I'd like to know your view. Do you think He should have hiked rates. You know, we've got a growth of 1.75% forecast, which isn't particularly impressive. We've got a no-deal Brexit uncomfortably high in terms of Mark Carney's point of view. Is— was it the right thing to do to hike? This is, this is a classic example potentially of a central bank doing what they've pre-committed to do in order to maintain their credibility, but not doing the right thing about the right times. Um, a very famous quote that says, "When the facts change, I change my mind. What do you do, sir?" I'll be impressed if anyone can tell me who it was that said that. I'm sure people like William in the room might know. Um, but that's it for, for the Bank of England. A hike, but actually when you look into the forecast of what's going on, it's dovish. And given Mark Carney's commentary this morning about Brexit, um, I think the pound's going to stay underweight. And I actually think this hike was and potentially is damaging for, for the UK economy. It looks like, if you look at the interest rate trajectory of the Bank of England, it's a bit of a mess. Um, all right, so in summary, this is as good as it gets in terms— yeah, Keynes, there you go, John Maynard Keynes: when the facts change, I change my mind. What do you do? Um, just moving away from the Bank of England briefly, talking about equity markets. Here we are back, look at these US equities, the S&P going back towards these record highs, firmly in our sights. The NASDAQ unstoppable, and really we're looking at, uh, Apple yesterday breaching the $1 trillion mark, and that came at the price of $207.05 a share. Meaning that Apple's worth over $1 trillion. And I just, I was reading an article about this this morning, it's so interesting. This is 20 years after Steve Jobs and the relaunch, and 20 years after the first version of the iPod. Now, I remember buying my first iPod, which was about the size of an iPhone. Does anybody else, did anybody else have one of those? The original iPods where you scroll round? To select the song. And, um, anyone else here have one of those? Isn't it phenomenal what's happened since that time? Since that time, just to let you know, that's when Steve Cook— uh, Tim Cook took charge in 2009. Really, if you reinvested the dividends that you received by holding Apple stock in 2009, your wealth or your position value would have increased by 2,000%. That's 2,000%. Isn't that phenomenal? What a success story. I enjoyed seeing Anthony Cheung's tweet today about how Donald Trump predicted the, the end of Apple just a few years ago, and actually they've been, they've been flying. Yeah, you guys are too young, you don't remember the first iPod, but that really was a game changer. And a world changer, uh, and rightly so then, you know, change the world, first trillion-dollar company, phenomenal. Just in terms of politics, China shares tumble again overnight, and really we saw, uh, weight coming into equities yesterday morning on the back of new trade war fears, Trump versus China, a new 25% levy on $200 billion worth of goods Um, that's all still going on in the background, but really I'm going to cut it here because the main part of the briefing about non-farm payroll is going to come this afternoon closer to the date. Those non-farm payroll, uh, experienced traders, you'll know that in the morning very little is likely to happen really. Definitely keep an eye on the US average hourly earnings. As well as the headline figure for non-farm payrolls. It's been averaging around 0.2%, as I'm sure you guys are aware. In terms of the headline figure, well, anything around 200 to 300 in line. Again, I don't, I don't think this non-farm payrolls data is going to have a huge impact at the moment, um, unless we get some really punchy average hourly earnings data. Consensus is 0.3. Unemployment rate doesn't really matter, to be honest. Um, it's more about the average hourly earnings and, and the headline rate. So let's go back to the headline rate. 213, um, following an upward revised 244,000 in May, well above the expectations. Yeah, last month very bullish in terms of expectations, and it'll be interesting to see if that momentum can be, uh, maintained in the United States. But You know, the US economy is on fire at the moment, isn't it? Growth of over 4%, low unemployment. Donald Trump's very happy, and perhaps that's why he feels like he can be a little bit more aggressive when it comes to things like geopolitics and trade discussions. But because if he's being judged by the American economy, American public on the economy, he's done his job and he's done, done well. I think they're incredibly happy. So this morning, guys, as, as always, bear in mind, non-farm morning, it's going to be quite quiet. Don't necessarily expect any major moves, but do keep an eye on the pound. That's going to be the main event, looking at that 1.30 handle after yesterday's dovish commentary and this morning's negative commentary coming from Mark Carney. Other than that, it's wait for the data on non-farm payrolls. Let's see if the US economy can continue to Impress. Yep, you're right, sorry, we do have, uh, French PMI and Eurozone PMI coming out this morning, uh, but bear in mind it's non-farm payrolls morning, so you're not, not likely to get a huge amount of data. Purchasing Management Index coming out of the EU and the UK, so that's going to be at 9:30, and then it's really— we've got retail sales, but as you know, it's, uh, well worth waiting for, uh, non-farm payrolls with the euro. Do bear in mind, if the pound's weakening so aggressively against the US dollar, you are going to get— you can get some sympathy moves as well. You know, the euro trade doesn't look too different to the pound trade. Look at the euro or the pound on a weekly chart going back to mid-2017 and you see huge similarities between them both, which really tells you how much of a dollar story it has been so far. Um, and it will continue to be so this afternoon if we get much better than expected payrolls data. But given what— given what Carney said yesterday and this morning, um, you might see the pound start to take a lead lower. Okay guys, that's it for the briefing. Have a good session. For those of you guys in the house, you're going to be doing the final Flow Trader session with me today. Um, I'll be back on the mic full time just after midday, fully focused on Non-Farm Payrolls. I look forward to seeing you then. Thank you.