Morning Briefing - 9th July 2018 ** Brexit update**

Okay guys, good morning, Monday 9th of July. Welcome to the briefing. We're going to be just eyeing up what's ahead of us across the week. Of course, big news over the weekend, or indeed around midnight last night, David Davis resigning. Just takes this Brexit saga into yet another new chapter. So we're talking about how markets have responded to that this morning, but then also looking at over the week ahead. Also, you know, just thinking about those important labor market numbers that we got from the Fed— not from the Fed, sorry, from the US last week on Friday— and how are things stacking up this morning. So let's go to the charts first and foremost. And if we take a look at— well, let's take a look. Obviously, the big headline story of the morning is this, this David Davis resignation. This is the pound against the dollar. And so let me just see here. This is the immediate response to his resignation, and the immediate response was that actually we gapped and opened higher. So actually sterling positive. So this is of course coming off the back of that marathon meeting that we had at Chequers at the end of last week, and If we have just a quick look at this— one second, let me get my screenshot right here. So obviously the press is— this is the dominant story in the press this morning. This is Theresa May at Chequers on Friday. Of course, this was that attempt to try and unite the cabinet around this more softer Brexit idea. This is the deal where essentially when it comes to goods, well, then we stay within the customs union effectively. I talked about this on Friday, so we won't go through it in too much detail, and you'll have read to death about this stuff anyway. But, um, you know, the, the frictionless trade for goods and food is the kind of key element of this, um, situation. So don't forget that this is just the government now finally— well, we'll talk about David Davis in a second, but this This is the government finally sort of beginning what they call their white paper, which they're now going to be producing this week. This will be the document that carries a bit more detail around what the UK want out of this trade agreement. Then and only then will we move forwards and actually start negotiating with Brussels. Of course, these ideas put forward by Theresa May, obviously there's perhaps a big portion of them that Brussels aren't going to like at all. So, you know, this is only one tiny step forwards, and arguably you could say it's not even a step forwards. But frictionless trade for goods is the kind of— this is the thing that has led to David Davis this morning resigning. I mean, we were looking out for this on Friday whilst they were at Chequers. You know, the big sort of headline risk was always going to be, right, does anybody resign? Can Theresa May unify the cabinet? Can they move forwards? To the next stage of the negotiation process with a trade plan of action. And on Friday, it looked like she'd done the job. Theresa May seemingly came out of that meeting with a statement suggesting that the cabinet was unified behind this deal. But of course, here we are. It was actually just before midnight last night, so 11:50 PM, as you can see here. That David Davis quits. So he has resigned. Um, it's in— obviously this is the guy that has supposed to be kind of leading the negotiation process. This is the Brexit Secretary. But actually, in recent months— and in fact, here's a stat for you just to show how much this guy has been sidelined pretty much over the last few months. In 2018, David Davis, who's supposed to be heading up our negotiations with with Brussels. And on the other side, you've got Michel Barnier, who's heading up negotiations for the EU. In 2018— and here we are in July— in 2018, those two have only had 4 hours' worth of discussions. So David Davis, whilst being the Brexit secretary in name, has really been displaced by Tim Robbins in terms of who's actually sat at the table trying to negotiate. Whilst on the one hand you might be thinking, well, hang on, our Brexit secretary here stepped down, who's going to now lead the negotiations? Isn't this going to result in a, you know, significant disruption to that process and a delay to it? Or, well, actually no, not really. Tim Robbins is still in place and will still be the man leading that. So actually, when you're looking at markets, and let's go back to the pound, and why is the pound rallied? Well, actually, David Davis stepping down here has almost kind of Given us a potential situation where who's going to replace him? And maybe we'll get a sort of pro-EU member of parliament replacing him as Brexit secretary. I guess the big risk is who else resigns. Now, that's why today is key. Who's going to follow David Davis out the door? Who's going to have the guts to actually say, you know what, this is not what the UK voted for and step down? This is what David Davis has done. So I think today's key, are we going to see any high-profile— and mostly what I'm talking about here is cabinet resignations. And so far, here we are at 8:39 a.m. No other members of the cabinet have resigned. And Boris Johnson perhaps might be top of that list of risk. If this is going to lead to chaos within the leadership of the Conservative Party, well, then we're going to need more cabinet resignations today. And that so far doesn't look like it's happened. So currently the pound's strong, and that's because this is pricing in a higher likelihood of a softer Brexit. This is where, when it comes to goods at least, we remain in the customs union. There is a, you know, in theory this solves in some ways the Irish border problem, although there's huge problems because whether Brussels are going to be up for this, I very much doubt it, because they're not going to want the UK to be collecting taxes on their behalf when ultimately the, the UK is not under EU jurisdiction. Also, there's, you know, questions whether the technology is there to actually, actually carry out what this, what this plan outlines. And so there's a lot of risk, of course. But for now, the pound's higher. Now let me show you on a daily chart, because last week was a a pretty solid week for the pound generally. But when you put it into, into the context of what's happened in the last few months, you know, we're still right down at the bottom. I'm going to draw a line here because we've got an important top here from the 22nd of June. So that's at 1.3368. So when you're looking at today's movement, 1.3368 is today's high. That is the June 22nd high. You know, I would say technically, if I'm going to just draw a trend line in here, well, then technically this is starting to maybe look a little bit like a trendline break. This is just a trendline just shaping how cable has been drifting to the downside ever since the big sell-off that we had at the end of April, which is more about the Bank of England not hiking rates. You know, we've been drifting lower ever since. But here, both Friday and now today certainly looks like we're getting a creep above this trendline. And this top from the 22nd of June is quite important, I would say. Any movement above 1.3368 would kind of confirm that trendline break. And then you're looking for moves to the 1.35 handle, which is the June high back on the 7th. Okay, so technically through the trendline. Now we need to see if this market can push through that 22nd of June high. So certainly, I mean, it is— it's not straightforward. This— yes, the pound has reacted positively, but do look out for any resignations from other hardcore Brexiteers in the Conservative Party today. And the more, the more resignations we get, well, then perhaps the more negatively this will feed back into the pound, certainly if there's any more cabinet members going, because then you've really got the, the risk of Theresa May's leadership being brought into question. And that will bring a lot of turmoil, which would certainly be sterling negative. Okay, so for now, slight Cautious positivity as traders price in an increased chance of a softer Brexit, but resignation risk on the table. Okay, so that's, that's, that's the kind of story that's dominating the headlines. The other thing also perhaps that might be helping with the upside here, there seems to be a bit of a flurry of headlines around the Bank of England this morning, and this is kind of Just continuing on from last week's comments from Mark Carney, the Bank of England is on course for an August hike. So certainly— well, if I go back to that cable chart, sorry, just to finish on this story of Brexit, on the story of sterling, you know, this big downside that we had at the start of— well, I should say the end of April, really. Most of that unwind was about us pricing out a rate hike. And so, you know, if the hike is now going to come in August, well, then perhaps you would certainly say maybe moves up, back up above the 1.35 handle would certainly be appropriate if the Bank of England are going to raise rates in August. Because August, you know, that's one month away. It's not, it's not long. So I would say if the Bank of England do hike in August, we're going to need to see cable above 1.35 as long as we don't get major resignations from the Conservative Party and Brexit Brexit risk taking over. Okay, that's one story doing the rounds. Let's just review quickly last week because I want to talk about the S&P. So US stocks, and actually generally Asia, had a positive session overnight. Check out the S&P 1-hour chart here, a nice bullish run into— let me get my rectangle here. Nice bullish run here Friday afternoon, and we've added to that this morning and overnight. Let's get this into context, though, with a slightly longer time period chart. This is the daily. And, you know, we're, we're making kind of moves to reverse these sell-offs that we had towards the back end of June here. Definitely the key target on the upside, I would say, for now is the high that we had in June. So the mid-June high is at 2791. If I zoom back a little bit, you know, in terms of resistances, you've then got the top that we have back in March. And then, of course, the all-time high that was set back in end of January. So these are your tops on the upside. But yeah, certainly bullishness. So why is this happening? Let's check out the charts. So we have the US labor market report on Friday. and we have— Sam. So this is the chart looking at NFP. So the result, just on the one hand, you know, looking at that job creation figure, was 213,000. So this was better than the expected 195,000, so more jobs created than expected. However, that wasn't really the story, that wasn't the catalyst for what then generated the market reaction. Because of course, we're, we're happy that the labor market is very strong. You know, certainly, you know, job creation has been healthy for, for actually a few years now. The unemployment rate is the best it's been for decades. And so job creation isn't really the risk. What we're looking for is wage growth, of course. And this is the wage growth data. Average hourly earnings for the month of June came in at 0.2% growth. But we had expected 0.3%. Now, we've been expecting wage growth to accelerate. This is one of the reasons the Fed have turned a little bit more hawkish and are indicating they're going to hike rates twice in the second half of 2018. Except actually, this number on Friday came in a little soft. So this is— when we think about equities, if we go back to the chart here, when we think about equities, this is like the perfect scenario because you've got strong job creation still. But actually those inflationary pressures aren't building quite as quickly as we thought. So maybe the Fed aren't going to have to hike rates faster. So you kind of get the best of both worlds here from an equity share price perspective. Strong job creation without the inflation. Of course, remember that rate hikes and certainly accelerated rate hikes are very bad news for stock prices. You know, that's a drag on economic activity, which in the end turns into a negative for revenue growth and so on. So the S&P wants strong job creation without inflation pressures, and that's what we got on Friday's report. And so we saw the breakup above the morning high, and then it was a nice solid run-up, and we've added to that this morning. Okay, so, you know, the, the Goldilocks effect here, the Goldilocks scenario. Well, let's have a look at what happened to the dollar, because, you know, the reason why we know it was the average hourly earnings that was the figure that dominated market reaction. You've only got to have a look at the dollar and how that responded. And the dollar generally weakened. So I'll just draw a box around that kind of Friday afternoon situation where we had a strong upward move for EUR/USD. So dollar weakness across the spectrum. And that's because of that inflation-related part of the labor market report. The average hourly earnings was a little soft. So dollar weakness, which of course fed through in some way to helping US stocks push higher. So if we look at actually this on a daily chart, well then what's important to be aware of is this top that we had. Uh, hang on, let me draw this. The top from the 7th of June, so that's at 118.48 on the futures. 118.48. Let me get rid of a few of these, uh, red circles to avoid confusion. Where that red box is, that's the key technical barrier to, towards a break above the 119 handle. Okay, so one anywhere around 118.50 basically is a critical sort of resistance area, and we're just right up there now, having had that pop to the upside Friday, a little bit added to that this morning. But 118.50 this week, critical price for EURUSD. Any move above there, and I'd expect an acceleration back up above the 119 handle. So let's think about this then for this week ahead, because on the one hand, yes, fine, you know, you've seen this labor market report from the US and it's, it's been a positive for risk. But then on the other hand, you've always got this trade war risk situation continuing. And one thing, I mean, I'm going to go back to the equity market chart because what happens here on the short term? Yeah, okay, fine. Positive labor market report for risk. But then one thing that's happening this week is you're going to get a ramp up, or well, I guess it's already been high every week, but I'm talking about the trade war risk. Donald Trump, obviously on Friday the tariffs got implemented against the $35 billion worth of Chinese imports. And this week we've got Donald Trump at NATO, key meeting. This is taking place on Tuesday. Then Trump's got a state visit to the UK. Then Trump's going to meet Putin. Trump is going to be top, top of the bill this week. He likes it no other way, of course. So the trade war risk, how is this going to feed through? And, you know, equities, of course, here very positive despite the fact those tariffs got implemented. I'm going to go back to the daily chart. And here's the question for you. Can the S&P. Can it break higher? Can we move above the June high? Can we get above the— where I've drawn that box, which is the March high? Can we launch an attack at the all-time high that was set back at the end of January? And it'll be interesting because this week we do have earnings season starting. So this is where US companies are going to report their performance for Q2 that has now finished. And I would say that in terms of that trade risk, well, let's talk about the index here, because don't forget the S&P 500 itself, you know, is a very broad-based stock index. And there was a good chart in the FT this morning. I'm going to show you here to talk about actually what's the performance been in the last 30 days when you look under the bonnet, as it were, and you look at the different sectors. Within the S&P 500. And this is very interesting in my opinion, because you've got certain sectors that have, you know, really punched and been very positive indeed. Utilities, real estate, consumer staples, telecom, healthcare— these have been really positive. And check out your sectors that have been negative: the financials, the industrials, the materials, and tech also slightly negative. I don't know if anybody knows about portfolio management, but this to me looks very much like a rotation of assets within the equity sector. You got a, you got a sector rotation out of cyclical, more risky sectors and into defensive safe haven sectors. So whilst on a top level, the S&P 500 seems to be performing very nicely, thanks very much. Actually, when you look underneath in the detail, while to me this looks like a defensive play, maybe this is people positioning for the trade war risk, you know, continuing to escalate. And actually, we've also seen outside of this chart, you've seen a rotation out of US companies that are exposed to global revenue, like Qualcomm I was talking about last week, the chipmaker that generates 65% of its revenue in China. Of course, is right in the firing line of this Chinese-US trade war risk. So you've got those kind of companies that have been massively underperforming. And you've seen a rotation into companies that have less exposure to global revenue streams. You've actually seen the Russell 2000, which is the US stock index for more medium— small to medium-sized businesses. The Russell 2000 has massively outperformed the S&P over the last 30 days. And that's because the Russell 2000 are a lot more domestically focused, less exposed to global trade. So whilst on the face of it, yes, the S&P looks to be ticking on and bullish, actually underneath, when you look at the detail, I think we are getting people starting to increase and elevate the trade war risk in terms of their investment decisions. And if that theme continues, well, then inevitably you are going to see, you know, the overall major indices, um, take a hit as well. So if we go back to that S&P chart, are we going to punch higher? Well, we'll see what the earnings season brings, of course. And this starts— the earnings season begins on Friday, and we'll look at the calendar for the week now. But do I think we can get back to the all-time high that we set in January? No, is my response to that. I think, and I actually said it in January, I think that January high is the high of the year. I don't think we can get there. Yes, we can test this high from mid-June. Obviously, this high from March is only just above there. So perhaps we can test the 2800 handle, but above there, I don't think so. I think the trade war risk is too real. And I think Trump this week, it might escalate as he's at NATO and all the rest of it. Um, all right, let's move on. I'm going to finally, finally just look at oil briefly, and then we're going to look at the week ahead. So this is the price of crude oil, and looking at a 1-hour chart, looking at the Thursday and Friday and now this morning. And so we're just chopping around the 74 handle here. In the end, on Friday, oil lifted higher You know, after the payrolls results and perhaps a bit of dollar weakness that helped to just lift oil, we didn't quite get back to the, the highs that we'd seen on Thursday. But I'm going to go to the daily chart like I've been doing for all these other markets. Just take a step back. This is definitely a good thing to do, definitely at the start of each week. For sure, you need to be looking at your longer timeframes just to get a sense for the bigger picture. You know, at the beginning of the week, always look at your long time period charts, definitely on a Monday morning, if not every morning. So here, oil— let me just change a few of these lines. So, you know, we've had this big move higher, of course, end of June, and we're consolidating that now. Yes, we had some worrying moves to the downside if you're a bull for oil, worrying moves to the downside, you know, on periods last week, really choppy and violent week, you know, bearish inventory data from the US. But actually, we're still here. We're still at the $74 handle. And so what might happen this week? Well, just in terms of the headlines this morning, this is what the Saudi Aramco chief has been saying. He's been saying, he's been warning that there's going to be an oil supply crunch. So he's talking about something I was mentioning last week, which, you know, fine short term when you're trading oil, fine. What are the inventory data from the US? You know, obviously this is a, you know, what are OPEC saying? What are Russia saying? You know, what's the, what's What's the shale industry's output? You know, how is this changing week to week to week? Well, yeah, fine. That's short-term stuff, right? And that is going to create volatility intraday for sure. But you've also got to make sure that in amongst all that short-term distraction, don't forget to kind of step out and look at the longer term. And in the longer term, we've definitely got a situation where— and if I change this chart on oil to a longer time period and we go back to a weekly— actually, let me go quarterly. Um, well, actually, no, I'm going to go monthly. Quarterly is too long. One second. I want to just get that kind of big sell-off that we had 2014, and then through 2015, through 2016, through 2017, the price of oil was on or below $50. And what that led to was the major oil companies massively ramping and scaling back their investment, their investment on exploration, for example, their investment into, you know, improving, increasing infrastructure at existing production sites. And it is this investment that has an impact on long-term supply. Now, yeah, fine, the oil price has recovered, but oil companies are not ramping back up their investment at this point. They might do If the price of oil stays above $70 for the whole of the second half of 2018, well, fine, then you might see a bit more appetite from these companies to start looking at investing back in on exploration and so on. But the last few years of very depressed prices has seen a collapse in investment, and this will have a negative effect on supply in the long run. That's like going into 2019. And so what you got, the Saudi Aramco chief Anthony Cheung saying this morning is exactly this, you know, long term, whilst the global growth story remains positive, we've got a very strong upside on the demand part of the equation and supply side remains negative. And so this should maybe lead to the upside trend continuing. So you had plenty of reasons to sell off last week, but all of those sell-offs actually in the end failed. So I think this actually sets us up quite bullishly. I'm not talking about this morning, I mean over the next few weeks, the next few months. I'd still expect this uptrend to continue. I still have a price target at $80 for this summer for WTI crude. So we'll see, we'll see how we get on. Right, let's just look at the calendar for the week then. So actually, lots happening, um, apart from today perhaps in the data calendar. And I'll have a look at today's calendar in more detail in a second, but it's more about, um, it's more about monetary policy. We've got the ECB's President Draghi making some comments as well as prior. We've got a couple of— well, we've got Broadbent from the Bank of England, which of course is perhaps a little bit more important now that Carney was hawkish last week, and we've had these headlines this morning just promoting the idea of an August hike. Tuesday's a busy session. Uh, inflation is a key kind of factor and component in this week's, um, calendar. We'll look at that so in, in a bit more detail, with US CPI on Thursday being the perhaps the most important economic data of the week. Um, but today we've got Tuesday, we've got things like inflation-related data from some of the European countries. We have UK GDP. So this will be a first glimpse at how well our economy did in quarter 2. We've got German ZEW data that will be important. I'm looking at— and then, and then also on Tuesday, you have the— oh no, that's Wednesday. Sorry, the NATO meeting is on Wednesday. So that's certainly going to be important, massively important for this trade war risk generally. So Wednesday, data-wise, you've got US PPI, you've got inventory data, of course, lots of Fed speakers. We've got the OPEC monthly report as well as their NATO. But of course, the most important thing of the week— I mean, forget about US CPI, forget about NATO, forget about Trump's visit to the UK. Of course, the big event of the week comes on Wednesday evening at 7 PM. It's the World Cup semi-final, people. It's England versus Croatia. And whilst I've mentioned that, let's just take a step back because I've got— I, I fully condone this, this gentleman's, um, confidence. If you have a look at this screenshot So we've got an English fan here who has had a tattoo saying England 2018 World Cup winners. He's already had it tattooed onto his stomach. This is, this is a class act from the English fan base. So England is coming home, guys. And another thing that's— check out the, the M&S share price. This is Marks Spencer's Back end of last week, nice ramp higher, breaking back up above £3. So why is this happening? Well, thanks to Gareth Southgate's waistcoat. So, um, Southgate wears M&S waistcoats, and he's quickly turning into a bit of a legend, and M&S have sold out of these waistcoats nationwide. The share price of M&S through the roof as a result. So Wednesday 7 PM, forget about global economics, it's all about the World Cup semi-final. However, on a hungover Thursday morning, we will have some German and French CPI data to navigate through. And then, as I said, big data on Friday— on Thursday afternoon with the US CPI. Trump is in the UK. Trump's going to checkers. Trump's going to meet the Queen. And then Trump's going to play golf in Scotland. That's his itinerary. He's— it's been designed to spend as little amount of time as possible in London for fear of mass demonstrations. So this will definitely be— well, I say grabbing the headlines on Thursday, actually, perhaps it won't. The football will, but perhaps Friday's headlines, maybe you're going to see Trump all over it. And then, of course, he goes off to see Putin. On Friday then, in terms of wrapping things up, one of the interesting things about Friday is that we have the earnings season starting. So you'll have the big 3 banks— Citigroup, JPMorgan, and Wells Fargo— kicking off quarter 2 earnings season. This will be continuing throughout the next few weeks. And, you know, be interesting to see. I think what's going to happen is you're going to see earnings reports again be pretty positive. I think people are worried about the trade war risk. I don't think it's yet had a negative impact actually on revenues, but I think you're going to see caution on the conference calls from these CEOs and CFOs about the second half of 2016 as they highlight trade war risk as being the number one threat to their momentum. So I think you're going to get really positive numbers on the headlines in terms of revenues and earnings per share, but I think guidance going forward might be a bit more cautious. Cautious. We shall see. I'm just going to finish with today's calendar in more detail. Where is my calendar for today? One second. Here we go. So just to finish on today's calendar, just to be— yeah, we've got, in terms of data in Europe, there's nothing, I'm afraid. And actually, this afternoon, we got some ECB sort of QE program data. So Economic data-wise, and this is typically the case, the Monday after non-farm payrolls, typically the data calendar is empty. So we're looking at perhaps Draghi at 2 o'clock, uh, as perhaps one of the more interesting things that are on this calendar. Um, so it's a monetary policy chat. Um, and then of course, obviously headline risk about any other resignations from the Conservative Party. Anybody following David Davis out of the store. Right, that's it for now, guys. Um, that's your briefing for the Monday morning. Uh, enjoy your week and have a good day. Thanks.