Morning Briefing - 4th July 2018

Okay, very good morning. Wednesday, 4th of July, so happy Independence Day for any US people following our briefings. And then I've already seen a couple of comments in the, in the chat room, so for any English people, I hope you're not too hungover. And congratulations to the England football team, the first time ever that they've won a penalty shootout at the World Cup. And so without further ado, here's our route to the final. Let's not beat around the bush here. So England's route to the World Cup final. The quarterfinals, of course, taking place on the 7th of July, so, uh, free up your weekend. Saturday is when the next game against Sweden is, uh, once we win that match, we then move on to the 11th of July, and then it's a toss-up between Russia or Croatia. So this will be on the 11th, and that will take us nicely through then to the 15th of July when we'll play off against one of the, the big four, uh, so France, Uruguay, Brazil, or Belgium. So take your pick, we're going to beat them all. It's fine. Here we go, it's coming home. As Sam North said when he walked in the office this morning— last night for him, not too sure what this says about Sam North and his life in general— but he said, "It's the best day ever of my life." So there you go. Anyhow, back to markets for a second. And let's just have a look at the charts. And as you can expect, things are relatively quiet from a news perspective. There isn't really too much going on. And certainly as this day progresses and we get into the afternoon, you can expect, unless something surprising develops, that markets will remain pretty range-bound. Volumes will be particularly light. There's obviously no trade in the US. We've got shortened electronic trade So things like equity index futures, for example, on Globex will close by 6 PM. But a couple things to be aware of, and this morning you've got equity markets relatively flat overall. But one of the main things I wanted to start with was oil, because even as I've been speaking this morning, oil's already kind of recommenced the the somewhat roller coaster of price action which we were seeing yesterday. Let me just clear up some of these lines here. But really, the move I want to talk about was one which happened yesterday. And just reading a lot of the press this morning, there is still not one single main factor that's being pinned for that dramatic sell-off that we saw in oil yesterday. Now, as I was talking about at the time, there were certainly a lot of different things at play. For one, obviously, if you start looking at this oil chart on a daily continuation, you know, we haven't really been at these levels for about 3.5 years. So getting to the point of flirting with a $75 handle, maybe a degree of profit-taking materializing, just given the, the speed of the run-up that we had had. Also, volumes very much impacted by the fact that Quite a lot of North American participants already out for the beginning part of the week, and certainly the kind of volume profile, if you like, just drops substantially lower heading into then when they're, they're off completely today. And then there was also that Saudi Arabia comment coming from the Al Arabiya news agency, which was talking about a Saudi cabinet meeting that they privately hosted on Tuesday and apparently had been in conversations with US President Donald Trump, and they were suggesting about that they could use their maximum capacity, of which we know is around 2 million, and prices just started to freefall. Very unusual to see that type of price movement, but as I say, it's one of those things where it's kind of a combination of several different factors probably all coming together and culminating into one single kind of sentiment move very quickly and triggered by technical breaches of key level and maybe algos hitting it as the momentum picks up to the downside. And just given those thin conditions, it kind of exacerbates the— and exaggerates the price movement. The interesting thing here is that, and what kind of supports the fact that there was nothing really too, uh, concrete on the fundamental perspective, is that once we got to the lower bound and we reversed kind of that weekly gain we rallied all the way back up. Um, so after dropping the best part of, you know, kind of in excess of $2, we then rallied $2, and then this morning we've just dropped another dollar. So yeah, I would say just erring with some degree of caution if you're looking to tackle WTI crude. It's obviously having some very whippy price action. And could be even more so today, just given the lack of liquidity. One person, of course, which you know is likely to kind of ramp up the calls for additional supply is obviously Donald Trump. Here's a graphic I just saw this morning, and it's kind of mapping over the course of 2018 what Donald Trump has said when oil has been at various different price points. So when oil was trading around a $69 handle, this is when Trump was tweeting saying oil prices are artificially very high. Then when we kind of turned off that initial test up at around $73, he said oil prices are too high, OPEC is at it again, which is not good. And then he obviously had this call on Saudi for the $2 million, which came most recently. So Trump definitely active to try and— what I feel is more not so much that OPEC, I think, would listen to him, just given the knock-on effect that this would have for destabilizing key relationships and tensions between Iran and Saudi, but more to appease the, the electorate of the US public, I think, just given the value of gasoline at the pump at the moment for the US consumer. But just looking at WTI crude, you've kind of got— I mean, some of these levels are from yesterday, but I guess you've got to take into context the range from yesterday's price activity. Certainly could be quite quickly brought into view, as we saw during that big sell-off yesterday. So downside, that kind of area between $73.11 and the very lower bound of the price movement that we had from yesterday's sell-off, so which would be around that S1 level today. It's kind of an area of support. So if you were looking at playing this range, if things were to remain quiet otherwise, then that's kind of the, the range I'd be looking at, which is a pretty wide one. But again, not sure the appetite to really get too involved, just given how, how violent some of the moves have been, irrespective of technicals or fundamentals. So probably more prudent to look at the the outer extremities of the, the broader range rather than looking to get potentially cut up in some of the, the noise in between. The other thing that's seen a really substantial move has been gold. If you look at gold over the last 24 hours, I mean, from yesterday morning we've gone from about 1— or $1,240 all the way up to $1,260. So a $20 move. And this has come amid some persistent dollar weakness, which has also kind of helped that crude oil story in terms of keeping prices elevated. I was just looking on a daily continuation this morning for gold, and obviously that, you know, in hindsight, that December low that we had in 2017, we kind of got very close to that within about $2 range, or even less than that, before we've had this really powerful bounce in gold. To what is quite a technically key point at $1,260, which is back to the, the lower bound of the price movement in October of 2017, and also some of the support levels from June, so last month. But an interesting point from, from Michael in the live chat room, and you guys will be familiar with Michael, trades gold a lot, spent many decades as a physical gold dealer And he was just kind of talking about this morning, uh, some of the, the physical process and demand side about gold and its pattern, where he said that gold has a tendency, tendency to be bullish over the summer. And he was talking about some longer-term positioning that he's been in now, taking advantage of that dip that occurred just a few weeks ago. So he's noting about the time of year. So obviously with gold demand on that side, there's, there's seasonal effects on the two biggest kind of buyers, that being China and India. So manufacturers returning from the summer holidays, they buy gold to start the manufacturing process for Christmas. You've also got on the Indian side Diwali as well, where gold typically seen as the kind of product of choice during those types of ceremonies and religious festivals. So yeah, something quite interesting to note. Gold's obviously been a pretty tough one to call, um, otherwise, but obviously going into that period, then the seasonal bias may be something to just contemplate for any— not intraday, but longer-term positions. Um, quick look and run through some of the news flow then. So trade war continues to be kind of a dominant theme. Um, yesterday what you did have was, uh, US shares saw a little bit of pressure after Chinese court temporarily banned chip sales from the American firm Micron Technology in the country. It's kind of the next step up in the dispute of the US tariffs on Chinese goods, which are scheduled to obviously come in on Friday. Also, we've just had in the last 45 minutes a Reuters source saying that Chinese tariffs on $34 billion of US goods will take effect from midnight Beijing time. So basically, given the time zone difference, this is the tit-for-tat because the US implementing their $34 billion worth of tariffs, China implementing their own and it's going to come 12 hours before the US ones take effect. So just given that, I'd be just mindful of keeping an ear out for any tweets or speeches from the US President today, just given the context of it being Independence Day. I'm sure he'll be toeing the line of making America great, fighting for America First policy. These types of messages definitely resonate on a a day such as this. So I'm just a little bit cautious about what does he say. Now, the problem you have here with markets pricing and how it could react to this type of narrative is that I think Trump's kind of already, um, kind of gone a few steps down the line already, because you remember he said that if China retaliates, he'll do the 200 They retaliate again, he'll do a further 200 billion. So what can he come out with today that's going to be another step above and beyond of what he's already outlined as potential threats? That's the only question. So even if he does come out with something quite inflammatory, how much of that has already been priced in? I mean, the fact that this Reuters report has come out this morning, the market's not blinked, I think says a lot about where we're at with this negotiation on the trade side at the moment. So although I think there's a possible tail risk that he could come out and say something which then could prompt the Chinese authorities to then kind of ramp it up again, I just struggle to see what else he could come out with at this point. And the Chinese have been fairly measured overall with their responses. I mean, this tariffs that they're implying that they're going to put in place in the coming days is, don't forget, a retaliation, not a proactive new thing that they're implementing. Okay, a few other things sticking with China. Obviously yesterday we were talking about potential run on Chinese assets, that being persistent selling of both their local equity and currency market. However, overnight the currency markets have been steadying as the Chinese central bank has appeared to intervene in order to address the steep decline seen in the renminbi in the previous day. So we've had a bit of a bounce, stabilization in the currency, kind of had some soft commentary coming out suggesting that they would continue to, to do not so much what's necessary, but more or less that being the objective, I guess, in that respect. And then their equity market— this is the Shanghai and Shenzhen share index— has been pretty choppy, but overall the main point being that it's, it's ended up stabilizing rather than continuing quite an aggressive sell-off. On a data perspective, what might be just helping assist as well, some of that local sentiment has been Chinese service data overnight, uh, where their service sector growth rose markedly in June, um, and actually came in at a 4-month high, well above the 50-point line separating expansion from contraction. So as you can see here, uh, a decent bounce back and, and trading at a nicely elevated level comparison to the previous 2-year, as you can see on this chart from that, uh, kind of light blue color line at the very top So that's the China situation. Otherwise, looking at Brexit, there's not a great deal that's going on. This article is very much a bit of a rerun of what Robert Peston was tweeting yesterday. And, you know, Robert Peston is one of those guys, much like Laura Kuenssberg of the BBC— he's obviously of the ITV Anthony Cheung, chief political correspondent. These are the sort of guys where if Brexit news does start to pick up pace, that are very much worth following on Twitter. And actually, Peston broke his source report yesterday talking about soft, the softest Brexit is where May is basically heading according to his sources going into this cabinet meeting. Did see a minor move in the pound at the time. but he actually published that on Facebook. So, yeah, gone are the days of kind of relying on your Bloomberg and Reuters. A lot of this commentary does come out via these means, but even then on Facebook it did come via him tweeting the link. So Twitter's still your port of call to try and capture some of this news. The actual story here on Bloomberg, nothing really too new. Pro-Brexit Tories fear she could water down her red lines. This is kind of what Peston was suggesting. And then May's to gather her feuding cabinet Friday. So you could expect, I would imagine, a couple more leaks to maybe come out today, tomorrow, ahead of that. And the question is not whether it completely breaks down or whether or not we move to progressively softer Brexit, which ultimately, from a technical perspective, to facilitate the Brexit deal in itself, I think it's hard not to see it going that way. So can she manage that though amongst the more harder Brexit contingent that she has within the senior cabinet, such as Gove and Bojo and so on, is the bigger question. Okay, looking at the calendar, there is a distinct lack of events happening. The one major thing of course for this morning is coming out in about 40 minutes, and that's going to be UK Services PMI. You guys know that just given the, the composition of the, uh, the UK economy, this is the key one. We had construction yesterday, but short-lived in terms of any real response in the sterling currency on the back of the construction numbers coming in slightly better than expected. The service one will be key. How much of a sustainable reaction will it have? Well, I I guess you've got to rely on the numbers themselves. The expectation today is for unchanged from the prior month, so basically stable at 54. Got a range of 53 to 55.5. 53 puts us back down to just where we were in April. 55.5 would be a stellar number, but we have been up and around those levels in October 2017. I guess one thing is, uh, any number up at the upper bound of that range, or indeed above that. I mean, if it was above, that would put us back up at levels we really haven't been in for a couple of years, and that would likely cement then, or tip the balance I should say, of an August rate hike from the Bank of England. If that sector is particularly performing well, it will support the argument of some of the more hawkish-minded members like McCafferty in his outgoing meeting, but then Saunders, and now the kind of more neutral turn, Hawk Haldane. Just actually, just keeping an eye on the euro here just as I'm talking. We just put it on a minute. Just had a little dip there in the euro, quick test on pivot, and we just had the French PMIs have come out but these are final readings and they're not particularly out of line. So timings-wise, to coincide with that, I think it's a little bit much to look into that as being the key culprit of that move. I would say one thing is conditions are very light. So although the baseline expectation is for things to be fairly quiet, tight ranges, not a lot going on, if there is a trigger point for something to happen, and quite often this could be maybe an algo misreading a headline, then you can get very big and very short, sharp spikes in price movement. So just be a little bit careful. Again, it's the illiquidity that's— that can cause these quite what look like news-driven moves, but in, in essence it's just a lack of people in the market, and so the price levels on the ladder just jump down in the case of what we've just seen with the euro. So just do be, do be careful of that. That's even going to be more the case as the session goes on, because after— usually on a US Independence Day, after we get to about midday, then the market becomes pretty much dead. And so we'll try for the in-house guys to maybe cover some, some more, maybe some theoretical content, do a couple lectures things like that, just so we, we can maximize the day. All right, gonna leave it at that, let you guys get on with it, and I'll catch you in the chat room. Thanks very much.