Morning Briefing - 5th July 2018

OK, good morning, guys. Thursday, 5th of July, and a welcome back for anyone in the US watching this. I hope you enjoyed your Independence Day celebrations. But just getting back into the swing of things and after what was a very quiet day, as to be expected overall yesterday, certainly a couple of news items to get you up to speed with for this morning. We've had a decent pop higher in the euro currency in reaction to a hawkish ECB source report from Bloomberg. So we'll have a look at that. Also, though, irrespective of the kind of the move in the euro on the back of that, that report, the DAX has also moved higher and European equities actually on the front foot despite this impending implementation, if you like, of the US and Chinese trade tariffs, which are looming obviously tomorrow. Otherwise, elsewhere, oil relatively flat. We're sitting at a 74 mark at the moment, down just marginally, about 15 cents. But certainly unsurprisingly, Donald Trump tweeting yesterday again, trying to forcibly intervene, verbally at least, to try and push the price of oil down. But we'll have a look at that in a second. And he's having kind of a depreciating effect on the market in terms of his ability to really move things. But looking straight into the news, let's get down to town, to business. We first of all have had some economic data this morning, this being German factory orders that have come in actually higher than expected. It was the first rise, obviously, as you can see on the chart, in manufacturing output since December of 2017. Both domestic demand and foreign orders were up And so in terms of this against expectations, coming in at 2.6% month on month against expected 1.1%. So it's nice to just be aware of and obviously just bucks the trend of the previous 4 readings. But this was the story that's in focus and captured the imagination, at least short term, for euro traders. And if you remember, this comes in the context of an incredibly dovish move that we had from the ECB. Let's go back to the euro chart and just refresh your memories from that, from that day, which I'm thinking from recalling from memory, that was the biggest one-day sell-off in the euro in approximately 2 years that we had. If you remember, they kind of more explicitly talked about the end of QE, but it was extended, but particularly on the area of interest rates, which they pushed back to looking to hike basically after the summer, indicating potentially autumn. And that was the big move that we had lower in the euro. If you look where we are at the moment, you know, if we recovered more than half of that move around that point at the moment, and it brings into context a quite key technical point of resistance on the upside, which would be here, which is the overnight high from June 26th. And we found a bit of resistance thus far on the initial breach of yesterday's high in the euro currency, which we, we briefly hit Yesterday morning we broke that already as Europe came in, reacted to this article, and we, and we found some resistance. And we'll be looking at that on the intraday high around R2. Above there though, obviously that 26 would be a kind of clear target. Now the reason for this is because this source report says that essentially some ECB members see end 2019 rate hike as too late. Now what they're referring to is what the markets are currently pricing in. Now, Governing Council, this source report just reiterating the fact that they plan to end their net asset purchases this year. We know that, but this is the kind of key— key part here is that some European Central Bank policymakers are uneasy that investors are not betting on an interest rate hike until December 2019, according to people familiar with the matter. They said a move in September or October next year is on the cards. People said, asking not to be named, even though any decision on the rates would depend on the economic outlook at the time. So essentially, as we know, ECB sources at the major financial newswires like Bloomberg and Reuters— this is the indirect kind of unofficial way of which the ECB for sure uses the agencies as a byproduct to communicate to the market in an unofficial committed sense. So, you know, this is the ECB trying to manage the currency. In this, or at least manage markets' expectations and consequently the performance of the euro and European assets. So they just feel like the market's got a little bit carried away with the dovishness of when exactly they want to hike. Now, does this mean they're going to hike immediately or anything like that? Absolutely not. This is about, for the central banks, keeping optionality and also keeping the market more where they want it to be. The later you leave it, the more the market can start to run away with mispricing what it is that ultimately you want to do, and that just creates in the long term more large bouts of volatility. So this is already— even though we're not talking about a rate hike for— well, look, we're not talking for a rate hike for another 12 to 15 months here in Europe, and they're already looking to try and manage markets' expectations. So yeah, a little bit of a hawkish report. That's come out. And just given the timings, really, Europe just getting hold of that about 6:00, 6:30 this morning, and that popping the euro up with a technical breach of the high from yesterday and some of the range high. You can see that yesterday resistance was quite a key level over the period of the last 2 weeks, and that just exacerbated some of the move on the upside. So it might provide a bit of a platform here if it pulls back down to what is actually the R1 on the day which is supported by that previous high as potential. If we continue to get some euro strength and if the dollar remains weaker, then an entry point for potential long could be retargeting then up to the intraday highs and beyond to that, uh, 26th high. Looking at cable, just while we're on the topic of the FX pairs, kind of similar story. A little bit euro strength overall has weakened the DXY So the dollar index down about 1/10, so not really an amazing move. But looking here on a 30-minute candlestick on the cable chart to encapsulate this week's price actions as far— and it's got a nice kind of trend line forming with the gradual lows getting higher up on the pullbacks that we've had thus far. And so just looking in context of the last 2 weeks, then this kind of area looks potentially quite interesting now. For, you know, kind of an area of support if we did pull back. And obviously there's upside targets that then you'd be eyeing up. So, you know, beyond the intraday high, which is here, you've got the 133 handle sitting just above, which is a nice target psychologically, just before the R2 level, which would also line up quite nicely with that high on the afternoon of the 26th. So if you're looking at maybe entry points to follow the move higher. We're gonna have a look at some Brexit news. I don't really think today that's too much of a risk, but we'll look at some of those risks in a second. Talking trade tariffs, and then we'll talk a little Trump on oil. Bloomberg have done like a crib sheet of what to look out for, so I have sent this out to you this morning as a bit of a refresher of the current state of play. But here's a quick executive summary. And what we've got here is obviously this deadline that we're aware of, of the US import tariffs on Chinese goods coming in on Friday. So what's happened here is that back in June, Trump said— this is it here— the US would be charging additional duties at 25% on $50 billion worth of Chinese imports. So this is basically split into two tranches, if you like. You've got $34 billion coming up on Friday, $16 billion to come to to follow thereafter. Beijing's stance, we heard that made clear yesterday. They're indicating, well, as soon as the US do it, we're gonna do the same to the same degree in terms of size. The only thing Beijing though is targeting here, which would be interested to see how much Trump can really push the envelope on the kind of aggressiveness of the negotiation, is that Beijing is targeting specific and predominantly soft agricultural goods, which hit right to the heartland of the kind of Trump electorate, if you like. So something obviously to monitor going forward as to whether or not this is going to influence Trump. But the measures, countermeasures from China, have been a responsive, not a proactive event. And so far, that's what the market's been comfortable with as yet. They've not taken it to the next level. Are the markets ready? Well, I think actually the implementation of this is now priced in to some extent. It's whether or not we get more commentary coming out is going to be a key thing to watch as we go through. What would be the real economic impact? Well, one of the things here is from a Chinese economic growth, if both rounds of the US tariffs go through, which is the $50 billion of imports, This, according to Bloomberg calculations, is going to have an economic impact of about 0.2 percentage points of growth in 2019. That sounds pretty small from a percentage point of view, but for an economy the size of China, that's a fairly substantial amount. The, the obviously key thing to look out for here is going to be whether or not this starts to materialize in a more tit-for-tat type situation with other major trading powers coming into the fray. Particularly things like the eurozone, for example, in the single market. So yeah, not too much really new here to comment on, just an update on we're getting closer to obviously that implementation deadline. Quick flick over to this one, and Trump renews OPEC threat on 4th of July. I think this is when Trump is completely predictable given the, the context of —of the celebration of the US's independence. Absolutely. Trump hitting Twitter hard yesterday to try and promote the kind of his protectionism of US interests and kind of firing guns blazing about everyone. And who better to target at this current point in the midst of a driving season where gasoline prices have touched recently multi-year highs, is to try and at least show proactiveness to mitigate rising prices at the pump, and so consequently pushing OPEC to bump up their supply request, of which we've seen this kind of argument materialize. And he's continuing to push that, that view. This is what he tweeted yesterday. He said, the OPEC monopoly must remember that gas prices are up and they are doing little to help. If anything, they're driving prices higher as the United States defends many of the members for very little dollars. This must be a two-way street. Capitals: REDUCE PRICING NOW. I think one thing that made me laugh yesterday, he actually tweeted yesterday, or the day before, he actually wrote a tweet saying, it's not a typo, I purposely mean to put capital letters to make a point of what I'm saying. The fact that he even needs to say that, I mean, it's a whole new level. But who am I to criticize? One of the key points here is obviously we've talked about Saudi Arabia and this maximum capacity threshold. Trump obviously has tabled this 2 million marker as quite a key number. As we know, Saudi pump about 10 million barrels per day. They've got a maximum threshold capacity. Most belief is at 12 million. So 2 million could be done. And that report which saw that dramatic sell-off the other day, yes, there are other things at play like a lack of liquidity and so on, but one of the things was that Saudi seemed to be listening to a certain degree to what Trump is saying. Because if you think back only about, only about 3 or 4 months ago, Saudi were talking up the market. Now they're adding supply and they've pushed through that agreement with OPEC, so they certainly have been affected by what Trump has been saying, but are they going to just flick the switch and then ramp up production to 12 million? I think that's incredibly unlikely. One technical point to be aware of here, I've just highlighted from the FT's analysis, is that although the kingdom, as we saw in that article in Al Arabiya 2 days ago, has said that they could produce 12 million if necessary, but the point here from a technical point is it would require at least 6 months with additional drilling and investment required to even get to that point. And so, you know, this then runs beyond the political timeline of the midterm elections in the US. And so I do still think that what Trump is doing is more of a, of a popularity posture on the political side domestically, rather than something which is actually going to materialize in reality, because If Trump really did want to move the price of oil, well, I totally agree with this point, is that if Trump wants to do this, well then stop exporting 7.7 million barrels a day of crude and refined products to other countries and basically build up the inventories in your own domestic nation where inventories have been dropping because of the net effect of that law change in America back in 2014 about the exportation of oil. Well, how about you just take care of your own supply-demand constraint, and then you start to, to take the supply situation in the US in your own control, and you can force prices lower. The only thing, of course, who is this going to anger? Well, it's probably going to anger US corporate refiners who've been benefiting from this rule change. And so it's kind of a lose-lose situation. Trump, I don't think, is going to pull the trigger to hurt corporate America in that sense. On the energy side. But then, on the same token, he doesn't really have, I don't think, the ability to really cultivate what he's after with the kind of the management of the Middle East. So I think this— a lot of this is Trump's bark doesn't have much bite, in my opinion. So hence, consequently, I think this is becoming the market's view, because the more Trump talks, It's kind of like the boy who cried wolf. No one really cares now what he has to say on this issue because we kind of priced in what his view is. And just remove some of these marks off my chart. The point being is that if you look at the price of oil, despite his cries for more production to bump the price lower, I mean, look where we are. We're $74, and on the grand scheme of things, here we are You know, we're at multi-year highs. He's having very little impact in that respect. But is that the point from Trump? Because is just the fact that he's seen as being proactive on the issue enough to keep the kind of his supporters happy? Maybe that's the plan overall, and he knows this. Yet to be seen. But looking at oil in terms of a range that we're trading, obviously taking into account that big dramatic sell-off that we had on Tuesday. That's probably the key range to look at here, that kind of S1 level. I know it's a bit messy to the tick, but that kind of range low and that previous point of resistance back on the 27, lining up as well with the 70. Don't forget you've got the 73 handle here and the S1 and those levels there. I think that's a pretty good base for what I feel still is to be supported crude oil prices. Don't forget though, today we get the delayed release of the DOE oil inventory levels because of the holiday yesterday. So that's obviously going to add to some short-term volatility. But, you know, obviously you'd look at more tighter ranges to the closeout price action. But looking more broadly, that's quite a key level, I think, to the downside where we are at the moment. On the upside, kind of flipping it reverse, this is kind of the key range of where we are at the moment, I think. So that's for, for oil. And let's just wrap things up and have a look at the calendar for this morning. This morning, in terms of economic data, is pretty light actually on the ground. There's not a great deal coming out. One thing though, for the US afternoon, we do have ADP national employment. So this is kind of the precursor that some see as quite a heavy weighting for the BLS nonfarm payroll report, which we'll get on Friday. Uh, my thoughts on ADP today are, sure, it might be something worth staying out of the market for any short-term volatility. Is it going to really be a game changer? I don't think so. Um, expectations are for 190, got a range of 155 to 220. Uh, even if you look at that, I really don't think that changes the overall perception of the market for from what the Fed are thinking or going to do. So I don't think really that's too much of a, of a risk, but something certainly to look out for. You get a couple of job indicators, much lower impact, and, and very seldom does it move the market. You've got Challenger layoffs in the US, weekly jobless claims. We know, see week-to-week fluctuations, but net-net we're at multi-decade lows in these readings. So again, not so much of a consideration. You get the ISM Non-Manufacturing number. So once again, looking out other than the headline for the employment component to just get a bit, a bit of, bit of a better gauge of the employment conditions going into the jobs report on Friday. Weekly inventories this afternoon, and then you've got the FOMC minutes. Let's not forget that as well. That's coming out at 7 PM. So if you do want to listen to that coming out live, then certainly feel free to tune in um, on the Squawk. They'll be covering it in full this evening. Um, well, let's have a quick chat about that. Here is the Federal Reserve, and looking at the Fed minutes, this is kind of summarizing it here. We're looking out for clues on rate hike limits. And so if you'll remember, quite rightly, the thing that makes this particular release potentially quite interesting— this of course was the meeting of which they materially changed the dot plots for 2018. So we moved from 3 to 4 interest rate hikes. Now this discussion then around the interest rate hiking cycle, the speed of tightening, their view about potential risks to economic growth, if any, from US trade wars developing, from a stronger dollar, from a flattening yield curve, you know, all these different factors are areas which we could look at for some detail as to try to see how hawkish or not are they within their underlying discussions to support the decisions in which they made in the last meeting. My overall view though is that yes, we might see a little bit of movement over upon the, the release for these matters as we scroll through the, the line-by-line details, but I don't— I'm not looking for dramatic moves here that are going to kind of feed through into the Asia session, the European Open, and influence Friday session because of this bigger, broader focus I think the market has, particularly with the implementation, as we know, of these trade wars. I think that's going to really kind of bump up the agenda again come Friday. So I actually think that maybe it will be a tradable event, but very short-term, and I think the market will get over that quite quickly in terms of the FOMC release. But for sure probably worth sticking around for if you can tune in later on at 7 PM and worth watching nonetheless, at least for a half an hour period to see how it gets digested. The other thing with the calendar and with Brexit, I did mention briefly that it's not really a great deal going on at the moment, and this is kind of the headlines that we're looking at. Theresa May's new Brexit plan rejected by key minister. You know who that key minister is by now. Of course, this is Mr. David Davis, has written to Theresa May to tell her her new idea on how customs should operate after the divorce is unworkable. So he's— you know, this is UK politics. It really sums it up. So he's basically had a conversation with The Telegraph under the cloak of saying that it's not from him, it's from an undisclosed source. You know, just why on earth he's not having this discussion with Theresa May herself and just getting this sorted. This is the state of play of the Conservative Party politics and what makes this kind of scenario that getting this deal done on customs union is going to be such a long drawn-out affair, which ultimately leads to a softer Brexit in this situation. In the short term though, the fact that David Davis, I think, for me, is still very critical and holding firm on this stance about Theresa May kind of edging softer on her stance of Brexit, you know, are we gonna get renewed rumors of a resignation? I would say the likelihood of that for me is not great but relatively high. I think come Friday when the— when this cabinet meeting kicks off, and also over the weekend, it would be unsurprising to to hear such type of rumor-mongering, I would say. In a short term, if that does materialize, typically it can be quite negative for political disruption. But a removal of him, does this give her a stronger hand for, um, for pushing her, her particular suggestions, which are more on the softer side? Does it then recover? So just things to think about and look forward to going, going ahead. On the UK side, You do also have, and you've probably seen in your calendar, Bank of England Governor Mark Carney is speaking today. So first thing I always do when I see this, and if you want to be prepared, it's what I recommend, jump on the Bloomberg— or excuse me, the Bank of England website, jump to the news speeches section. And basically, let me just show you, if you go on the speeches section, this is all the latest comments that have been made. You just click on upcoming And you can see here, so he's given a speech at a regional visit to the Northeast to be published at 10:45 AM. So text will be released, so it's not a case of just listening for the flow of commentary coming live. Bloomberg and someone will already have his comments, so you'll hear a dump probably of commentary at 10:45. So possibly worth keeping an eye on. Remember what we've had this week. You had the service PMI yesterday, uh, was strong actually. And so be interested to see whether or not he comments on that and we get any more clarity between this finely tipped balance on an August rate hike. So definitely for any sterling traders, mark that on your calendar. I certainly wouldn't be in any sterling position or exposure of risk over the— over that speech coming I'd rather wait for it, see what he has to say, and then look to reevaluate thereafter if there's any opportunities that materialize. Okay, it's now 9 o'clock, so I'm gonna wrap it up there and wish you all a good day. I'll be keeping an eye on the chat room throughout, so have a good one and I'll speak to you later on. Thank you very much.