The Trading Week Ahead: 14th - 18th October 2019

Okay, very good morning. It's Monday the 14th of October. Hope you're well and had a good weekend. And having a look then, Monday, as we normally do for the, the week ahead, this calendar here comprising of economic data, government and central bank speakers. We've also got corporate earnings in the US, really starts to pick up a little bit of pace this week. And then there's other things to be aware of as well, like there's a Columbus Day holiday in the US— not a market closure, but might have a bit of an impact on the market volumes for the session ahead in today specifically. The plan is for me to go through an update on the trade war situation— what was this partial deal that was struck between the US and China at the end of last week. I'm also going to have a look at Brexit— what is the latest developments as we go into quite a pivotal week for whether or not a deal can be delivered, or does Boris Johnson indeed pen a letter to Brussels in request for an extension? We'll find out this week in the coming days. We've had some Chinese data overnight again showing further weakness generally, or we can expect it at least, in their trade data and imports and exports. And then there's a few other things I can talk about as well to prepare you best for the week ahead. Uh, no Sam unfortunately this morning. However, he is in the office, um, but what I'm gonna do is just base this briefing all around the fundamentals. I'm gonna write the weekly strategy report a bit later where I'll include technical setups for all of the charts, but I'm going to leave that for then. I'm just going to get you briefed for what you need to know from a news perspective for this morning, starting off then with the actual overall charts. and the general market sentiment. It's fairly muted at the open, um, largely given the fact that there is that, um, US kind of non-market holiday today, uh, in respect to markets open. Volumes might be a touch lower than normal. The trade deal in itself obviously was already kind of known toward the end of last week, so there's no kind of massive gap in markets or anything like that this morning. I'd say potentially one that looks a little bit more interesting is the fact that the the, the British pound has been weakening from where we were with such a powerful move that was seen last week, of course, as it looked like perhaps Boris Johnson could broker a deal, which was surprising. And we saw a move from around the 122 handle all the way up in excess of 127. However, overnight in the Asia-Pacific session, kind of given back a good 70, 80 pips or so. And we do reside in the futures, at least at the moment, below the pivot level as it looks like there's still quite a bit of work to do in order for them to better strike a deal, both from Europe being satisfied, but also from the likes of the DUP as well and the opposition party voting through a deal. Because don't forget, as much as he might better strike a deal with Brussels, he still needs to get it through parliament as well, which is going to provide some obstacles. So let's go back into the calendar and have a look at things then. And perhaps I'll start with, before we go through the line by line, day by day, what's coming, we'll start with the trade deal and get you up to speed of what exactly has happened here. And so US-China, they, they reached a partial trade deal after what was actually at the end of last week the 13th round of talks. Now, a couple of important points here that have happened. China will purchase between $40 and $50 billion worth of US agricultural products. It will also address intellectual property and financial services concerns, according to the US President Donald Trump. Analysts though have said that the deal hardly touches on the real sticking points. Sticking points, of course, being those that we know, which is technology transfer and intellectual property theft. The two kind of big ones that again has led analysts to believe that really this is addressing in this partial deal what they've been terming the low-hanging fruit, things that can be easily done but doesn't really address the bigger issues at play. A couple of other things then that are important with this deal and that does shape or change the shape a little bit for the week ahead is that the US has agreed to suspend a tariff increase on at least $250 billion worth in Chinese goods to 30% from 25%, which would have otherwise have taken place on Tuesday. So that, remember, in kind of mid-September time, they delayed that 1st of October tariff increase to what was then going to be this Tuesday on the, the 15th. However, now that has been put off. The only thing is though, Trump has not made the decision yet on the tariffs that were subject to going to effect in December. He's just delayed the ones that were due to kick in this week. So if anything, it almost feels like this is just more of a temporary deal than a partial deal, in my opinion. And, and it's almost like we've just moved the goalposts further out down the line. The same, same underlying key issues are still yet to be really resolved or confronted, that being particularly on intellectual property theft But for the moment, delaying of tariffs in addition to the commitment for China to buy large $40 to $50 billion worth of more agricultural goods certainly will come as a little bit of light relief. But as you can see from the equity index futures this morning, there's been really little impact. The one thing though, I guess, if you start looking at the S&P is don't forget we are, you know, when we talk about where are we in the greater context of things. But we are not that far off, of course, the all-time highs. I mean, this is looking at the chart of the S&P over the last 2 years, and we are trading at 29,71 and a quarter this morning. The all-time high, of course, is only up at around 30,29 or so. So, you know, we're only talking about 50, 60 points and we're back at all-time highs again. Obviously, the nearer-term level of resistance to keep an eye on would be to start with initial resistance that was seen already at around the kind of 3,000 level. 2995 would have been that area of resistance on the daily chart going back to the beginning of the month. Above there you've then got the highs that we've seen, uh, kind of mid that double top in mid-September at 3022 before you get up to that point. Whether we can or not, I mean, it's yet to be seen. We've already— I mean, a lot of this movement here— if I just put an ellipse around it to make it a bit more clear— a lot of this was on the premise that some kind of partial deal was going to get done. So I think a lot of what this news I've just discussed has been largely priced in. And one thing that's coming out going forward now is earnings season really gets underway. And I don't think earnings season, although I'm not looking for it to be a real definitive market mover in a sense of it's going to be the dominant macro theme, it certainly isn't going to be particularly positive reading. And so by default then, not so much supportive of really reigniting a, a firm rally in equity markets. So I'm a little bit pessimistic on whether or not we'll get up there anytime soon in terms of record high territory, but this should provide this deal, at least in the short term, a bit of reprieve for the moment. Okay. Gonna quickly, well, start talking about US and China, jump over to Chinese data that came out overnight. Chinese imports and exports were both worse than expected in the month of September. Import slump signals weak domestic demand ahead of GDP data. There's a lot of important Chinese economic data coming out this week. This is the first of that and really goes some way to show why China really is willing to cut a deal, at least a partial one at this moment, with the US. Remember, obviously this data is backward-looking, so it's already showing the kind of the stress of which their local economy is under and the necessity then to try and secure some kind of deal to at least stop the, stop the rot, so to speak. I mean, this is what we're looking at when on a chart looking at the white line, which is exports, the blue line imports. And so they've stabilized, if anything. But the problem here is that it is in negative percentage territory on a year-on-year basis. And so nothing's really changed too much here. I wouldn't say this is really a signal to become overall pessimistic on the market and to start selling, so to speak, because this is really a continuation of what we have been seeing. And ultimately it's about the data now going forward. If this deal has been done and this kind of delays then the pressure cooker that is the threat of the implication of a deterioration in trade wars now to December, that gives a bit of breathing room perhaps for the economy to see a bit of recovery of sorts, at least from these very lower base levels. Um, moving back then to, to Brexit, and let's talk about Boris Johnson and where we're at at the moment. As I just showed you on the charts a few moments ago, sterling saw a phenomenal rally, the best in several months in fact, last week on the premise of perhaps surprisingly, well, kind of a combination really of could he get a deal and the lowering prospects then of the risk of a no-deal Brexit Brexit, because either now it seems as though we're going down one of two paths. Either a deal can be brokered, or we do in fact delay Brexit into a later date. Now, what's happened over the weekend? Who's saying what? Well, despite the optimism of Boris Johnson, the European Union warned that talks were still a long way from a breakthrough. A spokesman for the British Prime Minister said there's, quote, still significant work needed to be done before a deal can be done. Just so you're aware, UK Parliament of course gets reopened today by the Queen. It's going to happen later on. And then talks over in Brussels are said to be continuing with both sides ongoing at the moment. And today seen as potentially a kind of getting close to the last chance saloon now for some kind of breakthrough to happen. Otherwise, time as we're going to look at on the timetable, is quickly running out. Now, what have some of the other particularly important political people said in regards to what's happening at the moment? Well, obviously at the moment, without a general election happening, the Conservative Party is still very much dependent on support of the Northern Irish DUP. And their deputy leader Nigel Dodds has told Italian press on on Saturday that the party would reject any solution that would weaken Northern Ireland's custom ties to the UK. So, the DUP have kind of been flip-flopping at the moment on whether in fact they want to or not support the plans of the Prime Minister. But I'd say this one's a little bit more negative than perhaps where we were at the end of last week. And then the opposition party leader, Jeremy Corbyn, said yesterday that he was unlikely to support any deal agreed by the Prime Minister. All of this then means that some of the reports I've been reading this morning suggest that diplomats have said the slow pace of progress in these talks has imperiled the possibility of a deal being brokered by the 17th, 18th of this week. Now, why are those dates being put around? And that's because, of course, we have the EU summit happening. These are the kind of Brexit dates to be aware of. So the state opening of Parliament and the Queen's Speech happens today. The talks in Brussels are also ongoing between the two parties negotiating Brexit. Then the 17th and 18th, so Thursday and Friday of this week, was supposed to be when potentially a deal could have been ratified if agreed either at the weekend or today. Then we have Super Saturday. That's that additional Parliament holding a special sitting. I think that's only the fourth time— I could be wrong— if my history is right, since 1932 that Parliament has had a special sitting on a Saturday. So it's only ever happened really when war has broken out, in the Second World War in the late 1930s. It's very unusual, but goes to show the commitment on all sides to try and get some kind of idea or deal done and best way to progress with with this Brexit situation. A core priority for Mr. Johnson, of course, is to be able to get a deal done by those dates because he's had that strong message of do or die, getting a deal by the 31st or the threat of a no-deal Brexit. This has, though, increased the likelihood potentially, and this would not be unusual at all, of increased likelihood of an extra summit being held close to the end of the month. October 29th and 30th has been mooted as possible dates, and obviously that would come literally 2 and 1 day ahead of the symbolic kind of day as it stands at the moment, which is the 31st of October. So lots more to come. I would say this week will be particularly telling, particularly I'd say the next couple of days. Whether or not something can be brokered. It's kind of what we was discussing last week. There's still much to be done, and therefore there's going to be lots more tweets from various journalists, lots more source comments, lots more political kind of movement happening on both sides, both in the UK and Europe. So I'd say there's still likelihood of multiple-point moves to come from the pound throughout this week. Would I really want to commit to something right off the bat this morning? Probably not. Want to be more, a little bit more reactive to see how things play out. I'd say the, the bigger kind of trade at the moment though would be, given the elevation of cable last week, there's definitely room for a pullback of a significant nature if in fact a deal is not able to be done. The only thing here, and the reason why I think though the pound overall might while stays supported is that it's almost like no deal is off the table now, despite what Boris Johnson might have you believe. And so therefore, by default, it's not a case of the pound just collapses if he doesn't broker a deal, because at the end of the day, come Saturday, he then— unless he wants to play a very legal line— he has to write a letter to Brussels asking for an extension as per the Benn Bill that passed a couple of weeks ago. And so therefore we just extend Brexit, and again, no deal then is completely off the table. So any pullback, I think, of a magnitude to get back down to where we were, I think maybe unlikely. I guess a key level I'd say on any pullback, if we were looking at the intraday as far as today is concerned, that 125 handle looks pretty interesting. 125, you You've also got here, uh, the S1 on the daily pivots. You've also got the initial run on the move higher when some of the positivity was coming through about getting a deal done, the resistance levels before then, the more aggressive break that came on the morning of the 11th. So any pullback down to that level, I, I think could be quite interesting, uh, as a strong level of support, or in fact, um, potentially then if it's a point lower than where we are depending on what happens, is it a potential another point to get long again on the idea that either a deal or a delay happens. And therefore it's not as if Brexit is resolved, it's just kind of relief if anything that no deal definitely is off the table now. Any, any further push on the upside though medium term— let's go back on the daily— then your next kind of level of, of significance would come up at around the 128, 128.30 if you're looking at the futures. That starts to encapsulate the high in mid-June and the low point of support around what we were looking at in Feb of 2019. We had a test briefly on the day of large fluctuations on the 21st of May as well. Could be an upside target in that respect for the slightly longer time horizon. Talking of the UK, one final thing to mention on that point is if I go back to here. This is a tweet that I did earlier this morning. You might, might not have seen, but alongside the actual Brexit dates, there's a few other things to be aware of. And one is you've got a lot of Bank of England speakers. You've got John Cunliffe speaking today. You've got Flager and Carney speaking on Tuesday, appearing before the Parliament Committee on Tuesday. You've then got Carney speaking again, I believe it's at the IMF annual meeting. That's to be on Thursday. Layered in with that, not only you've got the politics and the Bank of England speakers, you've also got UK jobs data on Tuesday, UK CPI, PPI, and RPI inflation metrics on Wednesday, and UK retail sales on Thursday. So quite a busy week overall on all three different facets there, both economic, political, um, in that respect. So Going back then to, um, the calendar of what to look out for and just to run through finally a summary of everything here and where I feel some of the potential kind of pivot points could be for overall sentiment and direction for the week. Today is relatively quiet. I'd say if anything, it's more about digestion of the partial trade deal struck at the end of last week and how does the market overall feel about this? I would say still, despite the Columbus Day holiday, be interested to see how the US really want to take that and the perception of that deal, whether it is valid enough to help support markets at this point, or in fact, is it just literally, as I said, low-hanging fruit? And if anything, it's a disappointment and doesn't address the key issues. I think as much as that might be a possibility, I think overall, given that the next tariffs to kick in are not until December, that's quite a way off. So I think it'll be enough at least to sustain some degree of more neutral sentiment rather than turn into a negative. On Tuesday, in terms of major US data, you've got New York Empire State Manufacturing, that's on Tuesday. And then the other big US reading comes on Wednesday, which is US US retail sales on the 16th. Now, a lot of people were looking at that because of the idea of trying to get an insight as to how the US consumer is faring, because that has been the relative sweet spot in comparison to the more kind of manufacturing metrics that we've been seeing out of the US, which have been much more slowing down in a disconnect between what has been a relatively robust consumer, at least so far. And so the retail sales metric and Empire State Manufacturing, of course, with Philly Fed coming on Thursday, will be key components as to ascertain then the likelihood of an October cut from the Federal Reserve. And with that in mind, let's just have a look at the FedWatch and see what the pricing is of that. Probability remains at 75% for a rate cut in October. With at the end of the year, if we just have a look, the likelihood is now for just one, one more cut. So again, it's the shifting of the timing rather than the idea that the cuts are running out in that respect. But certainly if that trade war is pushed off now until December, that certainly takes a little bit of pressure off the Fed, because if you think about last week, only a few days ago, the market was pricing in two rate hikes that we'd be down in a 1.25% to 1.5% range by the end of the year. That's now moved back to just an October cut, and then that's it for the moment, for the time being. Otherwise, outside of the, uh, the data front, you've got a lot of corporate earnings coming out. Now, this is really the commencement of the bigger names. I think there's 4% of the entire S&P 500 has reported so far, so not that many companies But this week there's nothing coming out today given that holiday in America. But Tuesday pre-market, you get the kind of the unofficial commencement, if you like, of earnings season where we get JP Morgan, Citi, Goldman's, uh, you've got Johnson Johnson as well pre-market. So that will all, you know, those big top-tier banking names will come out. Remember that usually it's the first of those companies from each respective sector to report which can carry more of an ability to influence overall index futures if you're trading them. Once the first ones come out, the rest tend to then follow suit, irrespective of the fact that there could be some nuances between, you know, how they generate, uh, revenue, their product mix, and different things. Um, so really it's those first couple that will be interesting. And Johnson Johnson, obviously a pretty big firm as well, that'll be on Tuesday. Uh, Wednesday Probably the most interesting ones are going to be aftermarket. You've got IBM, particularly large market capitalization, but then also you get one of the FANG names, Netflix, which their, their share price typically is not unsurprising to see double-digit percentage moves. These kind of growth tech-related firms which tend to out- and underperform the market and see large swings in price activity could be quite an interesting one to just get a gauge of sentiment around those associated names. And then on Thursday, Morgan Stanley, Honeywell, probably a couple of the bigger names that stand out. Then on Friday, Coca-Cola, Amex, Schlumberger as well. We'll see off the week. So next week will be much more busy with earnings, but if you are looking for these top names, then they are all included within this calendar that I distributed on Sunday. You can access this calendar if you need it on my Twitter account, which is just here below my name. Just search AWM Cheung, you'll be able to find it. And then finally, from a Chinese point of view, you have the trade balance already out, but this time tomorrow we'll have the latest CPI inflation numbers from China. And then at the end of the week, you'll get Chinese GDP, industrial production, retail sales, unemployment rate, fixed asset investments. So definitely the full health check, if you like, of how the Chinese economy is performing. We'll know by the end of the week. Okay, that is it from me. As I said, I'm going to issue the weekly strategy shortly. I'll include all the technical charts within that, but otherwise I wish you a great day and week ahead. Thank you very much, guys.