Parliamentary arithmetic crucial for Theresa May

Okay, very good morning. It is Tuesday, 27th of November. Good to be back on the desk doing the briefing. Mainly going to focus on 3 things. Going to talk about the oil price movement and a couple of things beyond just this kind of supply situation. Going to have a look at a little bit about the US shale industry to hopefully make a bit more sense of what's going on and where the lower bound of this recent rout in oil prices could be. We're also going to have a look at Brexit. I've seen one of the best graphics that I could show you in regards to the parliamentary arithmetic for the upcoming meaningful vote on the Brexit deal. And then thirdly, I'm going to tell you why I'm eating a lot of Greggs recently and why that's been good for my bank account. So let's have a talk about what exactly has been going on. And just quickly wanted to show you this chart. This is the S&P 500 this morning. So if you weren't in early, you would have missed a bout of price action across the board. And if you were to map the US 10-year, T-notes would have had the opposite movement here when the equity rallied. If you were looking at the Aussie dollar, we've had a rally and a pullback. This is all because, well, first of all, let's start with the the news that came out last night, which we did actually finish positive on Wall Street last night. We had a bit of a bounce. Obviously, we've had a rout in the equity markets, one of the worst— I think it was the worst performing Black Friday we've had in about 7 years or so at the end of last week. And as Piers was saying in the briefing yesterday, continuation of the downward trend for US equity markets. But we came storming back yesterday A couple of positive noises out of Europe led by Italy, some concessions potentially on their budget deficit agreement and proposals with the European Commission saw Italy sharply outperform yesterday. I think Italian banks were up about anything ranging from 5% to 7%. BTPs were flying on the upside. So that did help alleviate one of the big kind of concerns emanating from the eurozone. Separately, You've had Cyber Monday, and Cyber Monday, for me, this is really, I think, not really that much of a surprise. If you were to map a chart of Black Friday and Cyber Monday, it's been increasing consistently year after year after year. So Cyber Monday on track to bring in a record $8 billion in US online sales. To give you a bit of context, basically Cyber Monday is comparative to a normal day in the US shopping online. It takes Cyber Monday 3 hours to hit an average day in terms of purchases made online. So a lot of this was playing out and certainly beneficial for some of those online retailers. I think Amazon shares were up in excess of 5% yesterday, which is obviously a large move on the upside. The FANGs catching a bit of a respite after being beaten down more recent weeks. One thing though was this came out after market last night. Not sure if you caught this, but this was President Trump in the Wall Street Journal days before. Obviously, he's set to meet the Chinese president at the G20 in Argentina at the end of the week. He said— so these are sources in the Wall Street Journal— that expects to move ahead with the boosting of tariff levels on $200 billion of Chinese goods to 25%. Calling it highly unlikely that he would accept Beijing's request to hold off on any increase. Now, hence the reason why this morning— so that article came out, I mean, I remember seeing that on Twitter while I was sat in bed last night. So that came out last night and you saw an immediate drop in Apple shares, and I'll get to that in a second of why Apple in particular. But this is why the markets had a quite stark reaction this morning because there was initially, and this is an understanding of how newswires can sometimes misreport stories, because it looked like Bloomberg snapped a headline saying that China's Foreign Ministry reached an agreement with Trump. This was citing a Foreign Ministry spokesman. The whole market, obviously, you know, this is China-US deal. This is the opposite of what Trump was, and the Journal was stating yesterday, is this would be a big turnaround in the events. And the market latched on to that. We started rallying quite aggressively, only for then the same newswire to come out. Uh, I mean, this is looking at a minute candlestick, so it was within 10 minutes that they then thought it might be prudent to state also that that spokesman comment came pretty much a month ago. So in fact, it's old news. And the market, as you can see here, that's when the comment came out and we fully reversed the entire move within the space of, I guess, 30, 35 minutes. And likewise, if you were to look at the US 10-year, very momentary blip on the downside you saw here, recovered. And so any positivity that emanated from that story has been and gone at this point. So the other thing I would highly doubt for me, when that news came out and the market was rallying I was kind of saying to the guys on the mic that, you know, just be a little bit careful here because I don't think Donald Trump would make that kind of concession with still a few days to run until we hit the, the meeting in Argentina. So little blip here, momentarily broke the high from yesterday in the futures, and we've just pulled back now, back below that level. Now I did mention Apple. Now Apple shares tanked after market last night. Because if you remember, Apple has been, you know, one of the companies that's managed to navigate its way— the kind of, uh, the secret dinners in Washington, D.C. with Tim Cook and Melania and Trump seem to have meant that Apple has managed to evade a lot of the tariff noise coming out of the U.S. president. But that changed last night, and Apple which has lost a fifth of its value in the tech market rout since October, was poised for another setback after US President Donald Trump suggested that 10% tariffs could be placed upon mobile phones like the iPhone and the company's laptops made in China. I was reading some of this last night. He's basically saying, well, Apple, why don't you just bring your jobs and manufacture your products back in the United States? And obviously this is Last thing that Apple needs given the, the dramatic repricing that we've seen in their shares over the last couple of weeks. And their shares bucked the trend in aftermarket, actually shot substantially lower. So worth keeping an eye on them later when we get underway and, and the regular kind of FANG stocks, I guess, on the back of that. So that was kind of where we're at, some of the action we've seen already this morning and, and Let's just flip over to then the next hot topic, which is that of cable. This is looking at cable on a— I'm looking at the 120-minute candlestick here because I wanted to just bring in this last little dip we've had in the last hour. So this has come after— and I'll make— try to make a bit more sense of this for you in a second— but a May loyalist has gone against the Prime Minister And that has caused the breach of the lows that we saw from the 21st, so last week, and then brings into play some of the movement that we've seen. I'm guessing just from memory that that big downward movement here was the resignation of Dominic Raab, because I remember that was a really sharp move lower given he's, he's kind of at the forefront of those Brexit negotiations. And so we're just bringing into play that low that was seen upon that day of all the resignations that were flying in at the time. That comes in at 127.39. We've also got a bounce support point of late October there. Looking on a daily continuation, there's a trend line from the, the kind of summer low that comes in. We had a retest in October, and then there was the Dominic Raab bounce after initially tested that trend line as well. So, you know, worth just keeping an eye on there as well as we go through the session today. For cable. So in the short term though, who is this May loyalist? This was the tweet: "May's Brexit deal is doomed," says former May loyalist and minister for today's program Sir Michael Fallon, who's calling for Brexit to be delayed so that a better deal could be negotiated. Now this did come out quite early, but Laura Kuenssberg, who's obviously probably the most followed journalist covering Brexit, was starting to circulate this comment and put her thoughts on it in a similar fashion about how this is quite a negative for Theresa May given the very tight squeeze for her to get this through the lower House of Commons, of which we heard yesterday that vote's going to be taking place on December 11th. On that front, let's just have a quick look at some parliamentary arithmetic because this is what a lot of people are talking about and this is probably the most simple graphic that I've seen to make a little bit of sense of what exactly we're going to be looking out for. And let me talk you through this FT article. So essentially, um, this is what we're looking at. It's kind of May's core support. I mean, the Conservatives, if you remember, the 2017 general election was akin to a disaster, went completely against what the Conservatives were aiming for, which was obviously a huge gap at the time between themselves and major opposition party Labour, thinking that they were going to get a commanding majority in Parliament, and that absolutely backfired, meaning that she now— her party relies on support from the Democratic Unionist Party, so that Northern Irish party, the DUP, with its 10 MPs, in order to then support a working majority to push key legislation through Parliament. The only problem is, of course, Northern Ireland has been the major sticking point for the progression of Brexit talks, and the DUP have vowed to oppose Mrs May's Brexit deal. So that support then has got to come from somewhere else. Now, there are 650 MPs in the House of Commons, so in theory she needs 320 votes in the Commons to secure approval for her Brexit deal. Why is that not a complete even split of the number? Well, that's because the House Speaker John Bercow and his three deputies do not vote. And of course Sinn Féin in Northern Ireland, their MPs have decided not to take their seats for some time, so they can be discounted from the equation. So what is it that we're looking at then to hit this magical number for Theresa May to get this deal that she's had approved by the EU at the weekend over the line? Well, this is looking at the Conservative loyalists. And about 150 Conservative MPs are on the government's payroll and very much expected to vote for Mrs. May's Brexit deal if they want to keep their job. Plus, there are backbench Tory MPs that are loyal to the party and ultimately do not want to see 3 of the potential outcomes if they don't support the agreement, that being of a no-deal Brexit, a second referendum, or a general election. And so she can count on anything between 225 to 290 MPs supporting her in a loyalist fashion. Um, so as we can imagine then, we're still short by a considerable margin of what's needed. So then we start to move on to the other camps of where could these other people come from. And this is when we start looking then at some of the other areas. So here we've got the Brexit deal skeptics, but before we get to that, let's have a look at the Labour rebels. So between 5 and 15 MPs, uh, a handful of hardcore pro-Brexit Labour MPs, uh, John Mann likely to support Mrs. May deal. Some other Labour MPs remain such as Caroline Flint could also back the withdrawal agreement because a majority of their constituents support Brexit. So unlikely from their personal political gain that they're going to go against the people who they represent. Also, at least 5 pro-European Tory MPs expected to vote against Mrs. May because they want to keep the UK closer to the EU customs union single market. And should the deal be rejected by Parliament, those MPs like to call for a second referendum. But I'd say that they're in the absolute minority, uh, at this point. So this is kind of looking then to some of the other areas that we have to have a look at. And this is the Conservative Leave Rebels, and there's believed to be anything between 20 to 80. If you believe Jacob Rees-Mogg, who obviously heads up the pro-Brexit ERG, the European Research Group, he says they count about 80 Conservative MPs among its supporters. These hardcore Tory Brexiteers could reject Mrs May's deal. However, don't forget the reason why we really haven't had a no-confidence push, or there's been a lack of those letters to come in to support Jacob Rees-Mogg, is because of concern about the risk that that could then lead to a general election and Labour seizing power, which would be an absolute worst-case scenario for the Conservatives. Talking then of the opposition parties, so this is when we start looking at some of the other areas. So the Labour loyalists, Corbyn has signaled Labour MPs will vote against Mrs. May's deal because it fails their— what's called a six tests on the Brexit. But by rejecting withdrawal agreement, he could anger a substantial minority of Labour supporters who back Brexit. You've then got the smaller parties. This is kind of everyone else outside of the two mainstream parties. The Scottish National Party's 35 MPs expected to vote against May's deal. Lib Dems' 12 MPs pledged to reject any deal based on a compromise. The Welsh Party and Green Party also expect to vote against. The DUP have also repeatedly said its 10 MPs will vote against this. However, I would say though, with the, uh, the DUP, what's going to be very interesting here is, is this just political posturing by them? And let me just scroll back up to where we are, which is really here. And that's because Arlene Foster, the DUP leader, has vowed that her party's 10 MPs will vote against Mrs. May's Brexit deal because it treats Northern Ireland differently to the rest of the UK. However, Downing Street is hoping the risk of a Labour government led by Corbyn, who has a longstanding link to the Republicans, so the Irish Republican side, i.e., this whole concept to potentially break down the Good Friday Agreement and a referendum on Ireland's independence and one united Ireland, would that prompt the DUP to change its stance and then ultimately have no other place to go but to support Theresa May? Then obviously she picks up those 10 MPs as well. So these groups of MPs above give Mrs. May a best case of about 315 votes for her Brexit deal. While this falls short of the 320 votes the PM needs to assure a victory, she may have other routes to success, namely then that of basically large-scale abstentions by MPs who would otherwise oppose her deal. That would allow Mrs. May to win substantially fewer than 320 votes by a technicality then. So you can see the whole reason then why comments like this where you get a loyalist person, although this is one individual, you know, it's so tight and to the wire that essentially every loyalist counts. One thing being here that in my actual base case scenario is much like that ING graphic Piers shared yesterday is that even if it does get voted down when they have their 5 days of hearing and vote ahead of that EU summit in mid-December, I do think that then it just means not that Theresa May will stand down as PM, not unless she is massively voted against, which I think is unlikely. I think then it just means there'll be talks of amendments, Europe ultimately will agree to those minor changes, and then the vote still gets done at the second attempt. Much as in what happened with the TARP, which was the Troubled Asset Relief Program of the US back in 2008, where basically Capitol Hill voted it down in first instance to buy up toxic assets of banks' balance sheets, i.e., bailing them out essentially. But at the second attempt, with some minor tweaks, it went through and was able to kind of backstop a lot of the banks within the US. I kind of think the same process will happen and materialize with with Brexit. What that does mean for price though, I think things could get worse for the pound before ultimately it gets better. I, I'm going to expect lots of hardcore campaigning from Theresa May to try to get public support. The more public support she can get, of which she actually has received after the kind of backfiring of this slew of resignations in the last 2 weeks, if that was gonna see her step aside, it failed. That's actually brought a little bit of public opinion back in her favor. If she can get some momentum behind that, I think that then these Brexiteer Conservatives don't really have much place to go on because then they're going against, again, the will of the people and so on and so forth. So yeah, a little bit more pain, I think, to be felt for the, for the pound. I I guess the levels here to watch is this trend line, because if broken, does potentially open up some downside room. But then ultimately, I think once the deal does get agreed at the second attempt, you're going to get a decent relief rally on the back of that. Uh, the question mark is if we breach some of these lower levels, and the level to watch would be the yearly low that was seen in the summer, then, you know, potentially that could open up some further downside. So that 126 really to around that 126 handle. So 7825 in the futures would be quite a key zone of support if that's going to hold. Before then, that rally might ensue on a deal ultimately getting done. Okay, moving on. Quick look at oil because, you know, yesterday or last week when I wasn't here, you know, we, we were, we were talking about the week before that Um, what I was looking at was really a key area of $55, and this is where I'm looking at was that area here, and really, uh, this support point at 55, that broke very quickly, and when that happened, the price just dropped like a stone all the way down to the psychological level. Where else are we going to go but $50? But now we found a bit of a hesitation at this level. And there's a couple of ways to look at this. One is, firstly, you got to be a little bit careful in the coming days. Why? Because today specifically, OPEC and non-OPEC and the Joint Ministerial Committee, otherwise known as the JMMC, who monitor the compliance of the agreed supply cuts within OPEC and non-OPEC nations, they're meeting today. And obviously talk of the town is are they going to intervene to stop the rotting crude prices and start talking about supply cut? Now I would say there is some headline risk for today if you are trading oil for those reasons. This meeting obviously happening before the G20, which commences on Friday, and then at the weekend on Saturday it's believed that Vladimir Putin, MBS, from Saudi is going to be meeting with the US President Donald Trump, and so that's going to obviously be critical for what action might be taken. Trump, if to be believed, still very much of the opinion that President T, as he's called himself, at the weekend has delivered a big tax cut equivalent to the middle class in America, but I want more. I.e., he wants prices even lower. Well, Mr. Trump, I think you're gonna have a problem with that if you want prices lower. And let's just discuss briefly why I'm saying that. That's because of this. So basically, US shale and oil and gas boom of the last couple of years has created a big concern about the exploration and production companies needing continual infusions of cash to finance their investment programs. And the plunge in oil prices we've seen over the last couple of weeks is bringing back these concerns back to the surface. To give you an idea of numbers, in the third quarter, a sample of 50 of the largest listed US— I'm going to call them E&P companies, so exploration and production companies— in aggregate reported operating cash flows that were higher than their capital spending, but this was for the first time since 2011. These results though were achieved during a quarter in which WTI crude averaged $73 a barrel. So remember, they're borrowing cash here in order to explore and, and, and make this record high level of US shale production. They've only managed to to basically become cash flow positive when oil has peaked at over $70. So where we were at this kind of period here in the previous quarter. However, of course, we've had over a 30% plunge in prices, which means if the price keeps going lower, well then these oil companies have debt obligations that they might not be able to pay. And so therefore credit spreads of these energy firms starts blowing out. And this is very problematic for corporate E&P firms. So as much as Donald Trump might want to help the consumer, he could also in tandem destroy the shale market in terms of US corporates, which of course would then create job losses, lack of investment, so on, so forth. And one of the key components, of course, has been a phenomenal rise to record territory in excess of 11.5 million of US production. But if these companies in EMP in the US start defaulting on their obligations, then we can quickly expect some of that to start coming offline. And then with that, with Russia and Saudi as well, if they start cutting, well, then the price might start to bounce quite considerably. Um, so one of the things here, just to finish off on this point, of the 50 leading EMP companies Only 15 could cover their capital spending from their operating cash flows in the third quarter. And the recent rise in natural gas prices and U.S. producers' use of derivatives to lock in revenues at higher levels for oil will help support their finances. But in summary, the sharp decline in the price of crude will pressure their cash flows and increase their reliance on financing from banks and bond and share sales. Another point here, the average bond yield for junk-rated borrowers in the energy sector last week rose over 5 percentage points over investment-grade US Treasuries. That's the highest spread now in 15 months, and although still well below its heights of under 20 percentage points at the peak of the last industry downturn in 2016, of course, when we hit $26 a barrel, uh, still some way to go to that point, but some troubling signs in the North American industry. So just a point to be aware of here. I was talking to some of the guys about, you know, what do I think here about oil at $50. I think $50 is a really, really important level for crude at this point in time. A couple things that I'm looking at here is Two things. One, timing-wise, the G20 is going to be critical, I think, for the near-term direction of crude for two reasons. One, on the sidelines of the main talks, you're going to have Trump talking to Saudi and Russia. Now, one of the things here, Saudi desperately wants to cut oil now because all of the time, as the price goes lower, they're out of the money in order for their fiscal breakeven to deliver their Vision 2030, which which is they need oil well in excess of $80. So problem that they have though is that because of that journalist that died, Khashoggi, who died under suspicious circumstances linked to MBS, Saudi don't have much wiggle room. So what Trump says, Trump gets. And actually, if you look, go back to the timing of when this oil sell-off happened, Guess what? The peak of this oil move for the year to date was one day after Khashoggi was killed. That was the signal then. Ever since then, the price catapulted lower. So question mark is, does Trump continue to push, and does his argument outweigh that of Saudi on the political, the geopolitical background and context If that is the case, then I think, well, that's a sign for lower oil prices and a break of $50. But for that to materialize, we also need a second factor. We need the demand side to be impacted, not just the supply side. And the demand side could be impacted if Trump speaks out quite vehemently and aggressive about increasing tariffs, as we've seen in the Wall Street Journal last night on China. That's going to see a drop in the demand equation on the prospects then of lower future global economic growth forecasts in combination with an inability of Saudi to act to cut production. Well, then $50 is going to break, and if $50 breaks, I think we're going $45 in very quick fashion. And I think then the big level to look out for on the downside is around this $42 handle. So you can see here that goes to the, the 2017 low, was also the Q4 2016 low, and has acted as resistance before as well in early 2016. So 50 is key. Will we break 50 this week? I'm not sure. I actually think the bigger moves here, the most decisive moment, is going to come at the G20. And so it could be then a case of once we come into Monday morning, Sunday night, depending on those two big parts of the equation— Trump's stance on China trade wars and the outcome of discussions between the talks with the Saudis and the Russians on the production side— it's make or break time. But I do think if 50 goes, we go lower and we go lower quickly. The timing-wise, if that's going to materialize though, I think won't be until next week. Otherwise, we might gravitate around this 50, could see some mild reprieve The problem is then, and once we get to $45, $42, we revert back to that discussion I mentioned about the US shale industry and the dynamics in which how it finances itself, it being overleveraged with borrowing, meaning then that Trump really has no choice. And once we start getting $42, $45, if that were to happen, you know, that's when I think that's going to be the bottom of this recent move. And I'd be looking for strong support around those areas. Okay, going to quickly wrap through the last headline then, and then I'll look at the calendar, and then we'll conclude things for the day. This is looking at Italy. Obviously, I mentioned briefly, big outperformer in the market yesterday. Some positive noises potentially of some concessions on behalf of the Italian government, who've been kind of staring down the European Commission who potentially Italy could face significant fines, which would be highly detrimental for a country that's indebted to their sovereign creditworthiness. However, despite the positivity yesterday, we have had the Italian Senate Finance Committee head say this morning that there is no reason to change the structure of Italy's 2019 budget law, flying somewhat in contrast to yesterday. But if you're looking at BTPs the Italian market. It's kind of brushed this aside, still trading relatively positive this morning, but worth keeping an eye— situation in flux at the moment. Quick look at the calendar, and this is what we've got on the agenda. So it's very quiet actually this morning, there's no major economic data. So with that being said, I'd say probably prudent to wait to the US session for them to come in. Let's see how these equity markets react. Remember, Apple fell after market last night. They'll be one to watch given they've now been included reportedly in some of these Trump tariffs for the first time, and so their shares need to reprice for this prospect because other tech firms already have done. But then also Cyber Monday, some good numbers, so let's see how things open on Wall Street. Otherwise, European Equity markets, not too much to comment on at this point. So I think it'll be a US-oriented session for real, more cleaner market direction in the US afternoon. In terms of data, really nothing major today. Case-Shiller monthly house price, this is, you know, second if not third tier economic data. You've got the oil inventory numbers and the API after market. The more interesting thing comes out of Fed speak now Fed Chair Powell speaks today. This obviously is really important because of the noises that Powell had been making about some of the pessimism over the global growth prospects, about just some of the things that have been going on, on from a macro perspective. And this has been a bit of a U-turn for the Fed, turning dovish after what they had been talking up was a higher neutral interest rate. And so the key question mark here, and I think Powell's comments today and this week and from the Fed are quite pivotal for market direction for the week as a whole. If he sounds dovish, then this I would translate into being a supportive factor for what has been a fairly fragile US equity market, because one of the things right at the core of the fragility of the US equity market and the reason for the correction that we've had is a fear about policy tightening. And if the Fed start to backtrack off that— and today not only have you got Powell, you've got Bostic, you've got George, all three are voters and they're all speaking on the economy. One thing to be aware of, uh, there is a speaker, the vice chair, a bit earlier on, so you're going to get your first little flavor of Fed thinking at 1:30. Because the other cluster of speakers is not going to happen until the evening, just so you're aware. But this is going to be a big event for this week, I feel. Probably one of the main highlights of the day on the schedule basis. Finally, why am I long Greggs? Well, you know, you talk about this equity rotational play out of the cyclicals into the defensives. Well, there's no better defensive than piling into a bit of Greggs when the temperature drops, gets a bit cold outside, you want your sausage roll. Because actually in the last quarter Greggs shares are up nearly 20%. I think year to date they're up double digits. They've basically lifted their outlook overnight. They've had a cost controls, been an incredible pickup in sales and trading performance. And yeah, their shares up 17% in Q4 alone, albeit no, they're still down about 11% on the year, but have come raging back. And yeah, looks like my, my shares in Greggs are playing out long term. All right, that's it. Have a good day ahead. Be mindful of a couple things then. Any comments Uh, there is that OPEC-JMMC meeting going on, so any intonation towards a supply cut, any tweets out of Trump, because we've had a bit of seesaw headline activity about the foreign Chinese ministry talking about an agreement with the US, but I think that that's old, and I think Trump will say the opposite. Um, and then any Brexit further comments, um, you need to be mindful of as well. Any loyalists falling and going against the PM would translate into short-term negativity for the pound. Okay guys, have a good session ahead. I'll see you in the chat room.