Taper Talk Returns But Should Markets Be Worried?

Okay, very good morning. It is Wednesday, 13th of January. As you can see, I'm joined by none other than Sam North.

Hi guys.

He's, uh, he's been building up his beard for his return to the morning briefing. But, um, I thought I'd get Sam on because we've got a new group on our professional trader program at the moment, and what I wanted to do was bring Sam on because as As you see, I deliver the briefing generally on the macro fundamental basis every morning, but I wanted to really connect the two in how is it that what I talk about then gets implemented in terms of a trading strategy. And obviously Sam is a trader, he trades every day. So I'm an analyst. So it's good to, I think, connect the dots and see how from a macro point of view we can turn that into an actionable trading strategy. And Sam's gonna be on, he can talk through the charts from a little bit more of a technical perspective. And hopefully we can tie in the news as well. So first things first, let's just have a quick look at the charts and how things are looking this morning. So the overall general sentiment was we had a fairly flat close on Wall Street, actually. I mean, it was one of the more quiet days, I'd say, for US indices compared to what we have been accustomed to in recent weeks. So pretty flat across the three majors. I think, as I've said a couple of times in Amplify Live stream this week, I think this week specifically is quite backloaded. The second half of the week really commencing today with US CPI this afternoon. And we've got Biden stimulus plan coming up. We've got jobless, retail sales. There's a number of things as well as US earnings as well with the big banks on Friday coming up that I think just lends its hand then given the run-up and general move we've had across asset classes since the blue wave almost surprised to some extent, that was confirmed last week, a little bit of a hiatus in price movement, just awaiting then some of these other bigger fundamental events to unfold. So interesting things to, to have a look at then, and perhaps then for Sam to talk us through on some of the charts, is in the FX space. So we've had a pretty decent bounce in the dollar, of course, in the last couple of sessions, but that did start to peter out a little bit yesterday, and that did help underline support for some of the major pairs, particularly a little bit outperformance in cable. One thing I was talking about in the briefing yesterday that perhaps might explain some of that partially is the fact that the vaccination program has been speeding up in the UK. We were early adopters of authorizing and then rolling out the vaccine in terms of Pfizer and AstraZeneca. So a little bit outperformance in the pound, and I've seen this morning it's at some quite interesting levels. So perhaps we could start there and have a look at some of the dollar pair Yeah, no, absolutely.

Let me just share my screen and bring, bring on the pound. And as you mentioned, the, the dollar pairs did hit some key support yesterday and maybe the evening before. And the pound, which we'll talk through first, you can see just coming up on my screen in a moment, this, it's had a really nice trend channel or trend line, we'll just call it for now, where you can see clearly respected going back to the high that we had on the sort of first real trading day of the year, the 4th of January, and was held really nicely all through yesterday's session as well until we popped through. And as is the case with some of these breaks, you know, they really do push on, and it doesn't matter if it seems overbought or whatever. And, uh, yeah, took out the, the high here. And, you know, as we looked then, this was the next sort of key level, and we didn't quite close the, the day above the high that we had on the 6th, which was also the low that we had on the 4th, but whatever we do today, and I guess then we look at it on the week, will be pretty key. So for the pound at the moment, pretty good. I would say it wouldn't be too surprising for us to have a bit of a retracement back down towards this area. Some of those support points that you were talking about, um, and we were saying this in the sort of the closing, uh, end of day calls for the pound, it would have been so key if cable could have closed below 1.3455 on the futures, but it couldn't. And then it reversed. And you know, then next thing you know, you're breaking above the previous support to have resistance. Sellers would be super happy to see it come up to that point but then go lower. It doesn't. We push on, and next thing you know, as we said, 1.37 comes in and it's almost at the high of the year. So the levels are respected well. Uh, the euro, just going to bring that on. And as you mentioned, that had a decent move yesterday. Same again, couldn't break lower. And what a level of support. I mean, this is just fantastic. And a couple of the The guys, uh, the back traders, although I think it's Gavin got one of these trades up from those lows, or it might have been in the pound, but either way, fantastic. And you can see again, it's that— got that solid resistance when we look at these lows. That goes and it doesn't hold back. And that's just people that are short, they don't want to be in this anymore. Um, and also the, the euro, I'm really, really interested to see where we finish the week here. I mean, we're still down on the week But I tell you what, a close above the, uh, sort of the breakdown area that we had back in April 2018, the first close above that, that, that whole point, it's going to be super, super key. We're in a bit of a mini range, you'd call it. Bigger move to come if we can either break above, break down below, uh, although ultimately that whole 120 area, I'd actually do quite like the, the look of, uh, a long. So yeah, decision time to come. And I think you can absolutely understand why price couldn't further break down yesterday. But yeah, it looks good, certainly for the euro and pound, although hitting resistance this, this early morning.

Yeah, I mean, one thing to be aware of for today is from an economic calendar point of view, from a data perspective, it's pretty much nonexistent as far as the UK, Europe is concerned. But Christine Lagarde, the ECB president, speaking at 9 o'clock, and she's taking part in a Q&A open session at a Reuters event. Now, she did speak earlier on Monday in the week, but she didn't really say anything. It was a very off-topic kind of appearance that she was, she was hosting. So this certainly brings about the prospect that definitely she could say something. In terms of what she could say, I guess it's the usual things. If you think about when the last ECB meeting was a few weeks ago, you know, what's changed? Well, a blue wave for one. There's been a notable market movement, and that will lead us on to talking about the Fed some of their rhetoric we've had in the last 24 hours has been particularly interesting. So anything about the blue wave, repercussions that might have for US global economy, does that alter the, the kind of policy view at all for the ECB? Vaccination rollout, we were talking about this at the beginning of the week, Europe's been very slow to really adopt particularly the AstraZeneca drug, which really is much more wide kind of scale in terms of its manufacturing distribution capabilities. And I think it was France's administering doses at— well, the UK is doing it 15 times faster than France at the moment. So there's a couple of things here which could be quite interesting if there is a Q&A format with the press in attendance, then to question her on these sorts of things. So I definitely would be aware of that if you're trading the euro from a fundamental perspective. But yeah, flipping it over to the Fed and talking about the US, there was actually a really nice move in US 10-year last night, and it came at around 6 o'clock. So I'll bring my chart up for a moment. Bottom right chart here, you can see the timing was around 6 o'clock. So the timing of when government bond auctions come out, we've had bond auctions and we have more coming through the US Treasury throughout this week, but it was the 10-year. And so the kind of equal maturity bond tends to react quite aggressively when it's being auctioned off or offered, and it was received with high demand. The bid-to-cover ratio was, was pretty high, all things considered, given the massive amount of additional supply that's coming onto the market. Still plenty of appetite to purchase this. And so markets took that as a bit of a catalyst. We bounced back up higher, and also putting into context the fact that the 10-year has been absolutely hammered since the blue wave and this whole kind of inflation expectation changed, the reflation trade on stimulus and Biden and so on. So a little bit of a reprieve there from, from the lows. But one of the things that, that's emerged here is a day ago we had two new voting members on the FOMC, Barkin and Bostic, and they were talking about this idea that given the rollout of the vaccine, if done successfully, then we could be seeing a solid recovery in the US economy by the second half of this year. And if that does happen, that might bring about this idea then of talking and discussing of tapering. Now, tapering, for those who were trading back in 2013, this will ring alarm bells because that was the period of the taper tantrum. If you go back and look at history and have a look at that episode, it was basically when, I think it was when Janet Yellen was first coming in. And it was this idea of, it's the first very incremental approach towards reducing then the looseness or the accommodative tightness of monetary policy. So you stop actively buying bonds, you start tapering it down as a tool in that respect. I would say that that's— that earlier fueled some of the kind of Biden blue wave trade, because if anything, then that's a tightening of policy. However, just to rebalance the force almost, yesterday and last night particularly was littered with Fed speakers. Two of them that were standouts: Bullard, I don't think is too much of a surprise. He's a big dove, so him talking about, look, it's way too early to be talking about that kind of thing. The future is not assured just yet, not particularly with the pandemic still raging on in America. But Rosengren, who typically is a leaning hawk, he said that basically we shouldn't even be talking about tapering or purchases of government and mortgage-backed securities just just yet. Don't expect that to be a conversation at this point in time. So that definitely helped that T-note bounce and also would have assisted some of that dollar weakness yesterday because I think people were getting a little bit apprehensive about just the word tapering being brought to the table. So the Fed were pretty quick to send out the troops to kind of counteract that, to alleviate any concerns that that's, you know, still, still far from, from being a reality. From my opinion, I think it's way too early to be talking about tapering. I was looking at some of the numbers, the number of people being receiving the vaccine in the US at the moment is still kind of gradually ramping up. It's still very low and definitely off initial Trump targets that he set out a few months ago, which I don't think is that surprising right now. It's pretty much priced in, but there's just so many uncertainties around A, the development of the virus, and B, the success or not of the speed of the implementation of the vaccine program, that I think you can't really be making assumptions just yet. Not quite out of the woods as to then the second half of the year. So yeah, that's my kind of take on that. That was really the major news for me to talk about. Other things, Trump, there was a non-binding resolution last night where the House basically were forcing Pence kind of like, look, you've got to trigger the 25th Amendment and get rid of Trump. Pence is not going to do that. He's already said he's not going to do that. It's— this is all about making a political point now. It's all about the optics for the Democrats in the House, which they have more control, to just really push home the point that Trump, you know, you're leaving, here you go, here's a departing kind of blow. We're going to have the impeachment vote today. That's probably going to go through the House and it will get rejected in the Senate. End of. Trump goes. See you later. So it's not really that big a deal for markets and I'm not really going to comment on it any more than that. But moving on then, perhaps we could have a quick talk about oil, Sam, if you want to bring that chart up, because we had the API inventories last night. So to get you up to speed, we have a slightly surprise, not a massive, but a sizable drawdown of 5.821 million. Expectations were for a drawdown just shy of 2 million. Cushing was a draw of 232,000, but we did have bills in gasoline at 1 point, just shy of 1.9 million, distillates 4.4 million. So what was the timing at half 9 on the price? Yeah, so we had the API a little bit of a bump higher And around that 53.19 was a relative area of resistance that was restricting some of the price action you see on Sam's chart there from yesterday. So the APIs did help act as a bit of a catalyst to what you just saw there on his chart has been a pretty solid rally really ever since the Saudis came out, surprised the market taking, taking that decision to cut supply. That's really kind of initiated the next move. And with some long-term technical levels being breached, we still remain fairly bullish at the moment. A lot of this obviously down to the vaccination program going as per plan. And also I'd be particularly interested to see the kind of details that Biden unveils when he does talk about his stimulus plans later on this week. That would be quite key then to see what exactly are we dealing with in terms of the size of potential boost or its likelihood of passing Congress. Um, but Sam, from a technical point of view, any thoughts here?

Yeah, I mean, what a move.

I mean, what's that? 1, 2, 3, 4, 5, 6, 7, 8, 9, you know, 10 if this week is positive. 10 out of 11 weeks to the upside. Um, I would— you know what, when we first came to this region, 4939, you know, I would have definitely have looked to scaled out. And you can see that's what the market did really. It did come down, it spent a couple of weeks below it, smashed through it last week, uh, and a great finish. And it looked for all money that it was going to hit the next sort of resistance point relatively quickly. Little stall, uh, in the first— well, first sort of part of this week, but we continued up. So 54, 55 looks super important. Good resistance back on, uh, yeah, the 18th of Feb, so almost, um, almost 365 days ago, although it did go pretty sour from, from then, as I'm sure we can all imagine. So yeah, for me, that would be the, the next point to look at. Would that be a place where I would, you know, come out of all that trade? No, I think 5728 is a bit more important. Reason being, that was just that support point that gave way, uh, really from, you know, did well literally a year ago, the 21st of January week. And then we really did push on. Obviously some very key support here then broke later. We've just got above that as a resistance. So yeah, 5728 will be not an ultimate target because I think there's still legs for it to go, but a point where I could really understand there being a bit of a breather. So for me, if I was multiple contract long, multiple lots long, then I'd be looking for, for price to come to, to this point. You know, I'm not too interested in sort of looking at, you know, Elliott Wave or lunar cycles or anything like that. I prefer to look at these key market levels that have been respected before. Last time we broke through this, we really pushed lower, continued down. Yes, there was a fundamental reason for that, but what a place to take some key profit. So I reckon 5728, nice line in the sand. I mean, from a psychological point of view, a close a week above that then the week after that I think we can continue on and on and $60 comes quick. But yeah, $57.28, uh, not the next level because that would be the, this, uh, the point here, $54.46, but that would be my short-term big target. Cool.

And I just wanted to share this for a moment, which is very recognizable if you're an oil trader. Um, this is looking at Persian Gulf. And the reason why I just wanted to briefly bring this up with some headlines this morning that Iran have conducted missile naval exercises in the Gulf of Oman. So just wanted to talk about that just briefly. So here's the Gulf of Oman, obviously the northern tip of that area, and the southern border then of Iran is the major global choke point in the world, which is the Strait of Hormuz, which obviously is particularly crucial for the transportation maritime routes coming out of the Persian Gulf from the likes of Saudi, Iran, Iraq, Kuwait, and so on. So very, very sensitive area. But oil hasn't really moved. And absolutely, that's what I would expect. So there's a couple of things in how I would interpret that type of news flow, which is why is Iran doing— making these kind of noises at the moment? Well, for me, it's quite simple. We've got a new administration coming in. So it's time to start kind of rescaping like the landscape, if you like, of what is it exactly that Team Biden is going to do in the Middle East and with the Iranian nuclear accord and so on and so forth. So they're just— this is all— it's almost like Brexit posturing, just in a slightly more sensational way, talking of conducting missile tests and so on. But it's the same negotiation point. It's just making a stance in order before then you deal with the new, what will be political force, which will be the Biden administration. So for me, I don't really see this at this point turning into anything more than just rhetoric. However, obviously, this is a highly sensitive area geographically for oil prices. And if there were— if we move back into— think about this time last year, Sam. Remember, it was— I remember the Daily Mail putting out a headline of, we're heading into World War III. Yeah, that was when obviously the Iranian revolutionary commander got killed, and then there was the prelude to that was lots of, you know, kind of drones being shot down on disputed territory in that particular area and cargo ships getting captured. And yeah, we're not quite at that level right now. However, It's definitely worth just bearing in mind and keeping an eye on. And certainly any disruptions here would obviously be a strong positive force to push oil up through some of these technical levels. But I wouldn't anticipate that being this situation any more than just rhetoric at this point in time. A quick look then, Sam, perhaps some of the US indices. I know it was quite a quiet day yesterday, but we've got CPI coming out later on this afternoon, inflation. Is likely to move higher on gasoline prices. Obviously, you've just looked at oil, it's had a phenomenal ride of late. But outside of that, price pressures, the perception is they're still pretty benign. I don't think it's the point of people getting spooked just yet about inflation. Remember, this whole inflation trade that people have been looking at on the blue wave, we're talking about future inflation, not that it's emerging right now, because remember, in the US specifically, we're in the midst of, um, stricter, increasingly so, lockdown measures at this point in time, which is going to impede demand, generally speaking. So, um, yeah, US indices though, Sam, any, any—

yeah, and so on. Let me bring on the S&P now. Um, one of my favorite trades really from, from the back end of last year across multi-asset has been the false break of a level and especially when you've had a nice, you know, not necessarily nice because admittedly in recent weeks it hasn't been one direction completely, but it has still been an uptrend and it has been for a while. But the, the sort of the false break when it looks like on the intraday that it could break down and it just can't quite, you get these false sort of pushes lower and then you get the reversal. Um, and it's been a really good opportunity, like I said, across multi-assets. We saw it in the euro and the pound uh, earlier in the briefing. We've just seen it now with the, the S&P as well. So that's an area to certainly keep an eye on. If I was, you know, long, medium-term, short-term, um, you know, this is the level for me where I would start to just panic a touch if we come lower. 3774, really nice support in recent time, but also the high that we had back on the, the 4th of Jan. So it was, uh you know, another key level. So that for me marks an important point to the downside. If we look to the upside, well, you've got a pretty key resistance, and you're gonna have to call it a zone. You know, today's high, if it breaks above that, you've got to be careful because yesterday's high is just above that. Then you've got the R1, then you've got the high that we had back on the 11th. So it's, it's a zone, uh, and a key one at that, because you've almost got 3 reasons, or 4 if you include today's high. So a bit of a mini range now. What happens, uh, when we get up to there will be, will be interesting. A break above, then we look at new all-time high territory. Uh, if we do find resistance and come back down, midpoint, albeit choppy, you would have to sort of give it towards the pivot as another key level. So these would be the 3 points that I would look at today. And whether they even come in to get tested, of course we don't know right now, but that's how I would see it, uh, on the, the longer time frame. And I was uh, looking at, at this with a few of the guys yesterday, just about, you know, using Fibonacci. I'm not a massive fan of it, but on longer time frames I will consider it. And I was just looking at sort of this recent push that we've, we've had to the upside. And depending whether you take it from the 30th of October low or the 24th, again, up to you. And that's maybe the issue with Fibonacci, is that not everyone will have it on the same point. But this whole region here, the 38.2, 3,600, that would be a lovely pullback to, to get in. But like you said, is there a worry at the moment? Are people panicking? Not just yet about stocks. And for us to get down there would be a 6% move. I don't know about you, but I can't quite see that happening just yet. So for now, I'll be looking at other highs and 37, 33, or as we said, you know, even maybe another little false break of 3774 could be, uh, worthwhile thinking about. Quick look over NASDAQ, if it's okay with you, uh, as well, the Dow, before, um, looking at the, the longer time frames. You can see that yesterday as well came down to a sort of a lovely area of support, and it's that false break. I really like this across the board. I think the Dow Jones, uh, did the same, albeit on its sort of previous overnight low of the day. Look at these false breaks here. Price comes through, can't close, comes up, hits it as support, and yeah, off to the races. But importantly, today can't quite get above this all-important resistance level, so stuck in a range. Um, and yeah, I mean, the more times we come down and test those supports, you know, do you want to get long? But I think overall for now we can continue higher, I would say. And how do you, how do you see the short term?

Yeah, it's interesting because there's we were looking at the T-note move from yesterday, and there was obviously a decent pop on the upside. But equities haven't blinked. This whole talk about tapering, obviously, for me, it's income perspective. It's a little bit more direct in regard to probably yield sensitivity. But stocks, stocks not bothered by any of that chatter. And I think that's quite telling. You've also had a number of people come out, criticize Big Tech, and obviously none other than Donald is spearheading that, talking about they're controlling society and we should, you know, take away their powers. But the one thing that this probably will lead to, this situation that did happen, whoever's fault it was on Capitol Hill, is that, you know, the Democrats will be doing just the same. They will want to relook at the types of regulations over Big Tech. And we know that Big Tech is such a proportionate you know, large representation of what really is the stock market these days. So, uh, even with that, the market's still not coming off. So, um, yeah, it's hard to see this market coming down. I mean, you were just looking at some levels there, but you're looking at pullbacks down to what, 3,600?

Yeah, 6%.

Hard to see that happening, a 6% move. I just can't I can't even, I can't even see it. What could cause it? If I'm talking, if I'm thinking about, let's say, this week alone, for example, probably the one thing, you know, I don't think this would happen, but what if Biden came out and it's an absolute damp squib and it's just his proposal is just flat as a pancake and it's like it's not stimulus at all?

Yeah, it's just, there's any risk that Biden could, you know, come in and, uh, do a lockdown like a full-scale one?

No way, no way. That's absolute baloney. He put that out as a political ploy just to be contradictory to what Trump was saying. Absolutely have no belief at all. Not only could he not do that, administering a nationwide lockdown when the US operates on a federal and state level is impossible. That's just all political gamesmanship. So no. But yeah, would that impact markets? Absolutely it would. Would he do that? No. Could he do that? Be incredibly difficult. So Yeah, I don't buy into that at all, but yeah, a risk perhaps. I still think that the main risk here is still the virus, and the main risk on the virus then would be we're getting lots of reports about not just the spread of the UK variant, but perhaps now a newly formed US-type variant, a mutation of your mutation. Now, if that then renders vaccines redundant, we get pushed back a couple of months which is going to impede the timings of the recovery, then I think we get a pullback. But then the Fed come in again and start talking it up. So, but that could create your 6% pullback in the interim period. Must stress though that that's not the base of case of what I see happening at the moment. But that would be probably the one single biggest risk to the equity space. But yeah, low probability. Cool. All right, well look, I'm going to end this briefing now, but we're going to take a few questions for the guys in the Amplify Live community. All right, thanks, Sam.

Nice one, thanks.