The Trading Week Ahead: 19th-23rd August 2019

Hey, very good morning. It is Monday, 19th of August. Hope everyone is well and had a great weekend. Going to do the usual on a Monday, look ahead for the, for the trading week. So as you can see to the calendar of the side of me, a couple of points that we can touch upon, but underlined and bolded, you can see some of the main events that that are happening this week. Um, most importantly is going to be actually on Friday where we get the main speech from the Fed Chair Jerome Powell at Jackson Hole Symposium, uh, in the US. I'll go in and explain a bit more of that in detail in a moment. Um, that is actually part of a 3-day meeting, but again, Friday is when Powell is speaking, which will be the key one. We've also got the FOMC minutes on Wednesday night. Uh, we've got the flash Manufacturing Service PMIs for the eurozone on Thursday morning. And we've got also not just minutes from the Fed, but we've got minutes from the RBA and the ECB as well. And people obviously very much looking to get the latest kind of hints in towards the timing and size of any further potential policy easing to come from both those central banks as well. And then to wrap things up for the end of the week, you've got the G7 Summit happening in Biarritz in France. And of course, this is the first outing for our new Prime Minister Boris Johnson in the kind of international platform. And then Trump, of course, will be always interesting to see what he has to say, just given what we're going to look at. He unsurprisingly has refocused now and pivoted away from China, and he's been talking about Europe at the end of last week, of course, in the run-up to the G7 where he's going to be meeting them face to face, those officials. So that's kind of the week in a summary. But quick look at the charts, uh, again, Sam will give his full, uh, kind of overview both from an intraday and a weekly point of view. He'll also then issue a weekly strategy report, so keep your eye out for that. He'll tweet out the details from his own account. But looking at the charts this morning, relatively quiet. There's not really any major news, I would say, that's occurred over the weekend. We had another mass protesting in Hong Kong. I was talking to some of my family over there at the weekend, and apparently the reported numbers were up around 1.7 million. So, you know, getting close to that, that kind of size that we had initially a few months ago when the protest really started. Generally peaceful, so no violence this time, but certainly that, that situation continues for the moment. But overall, other than that, news flow pretty quiet. A lot of people still digesting this inversion of the 2s-10s part of the yield curve. And what does that mean for then people's perception about a looming reception— recession, excuse me. It was Sam who went to a reception at the weekend. And then that's really dominated much of the news kind of cycle. So this morning, FX markets pretty quiet, to be honest. Dollar index is basically flat. Euro-dollar has done nothing so far. Certainly some trigger points as we go through later into the week to look out for, for the euro. Sterling, a little bit of a pullback. A few political updates I can run you through. Gold pretty quiet, down about $6. The 10-year down about 10 ticks, with actually US and European index futures trading higher. So actually, if anything, a little bit of a positive feel to the setup this morning. You've got a kind of unwind of some of the— what I feel is an overhyped situation about the inversion of the yield curve. And I think a little bit of a pullback from some of the severity of the moves from last week. And so equities a little higher, kind of unwinding then of some of that risk premium to gold and US Treasuries. And subsequently, as a little bit of calm is restored, WTI crude just trending higher as well, with mimicking the equity movement. And we're up, just taking out the highs, it looks like, from Friday. So about 86 cents at the moment, but a pretty decent start to proceedings to get things underway. So let's run through though the news in more detail before we look at the market from a more technical perspective. And again, this is I did a couple of tweets at the weekend because, as I said, much of the, the bank research as well as the, the kind of public financial media was all focusing on, on the yield curve. And this was the first one of interest that I saw, and it was looking at the delayed tariffs have not prevented the US yield curve from briefly inverting. So, you know, we had this kind of positive response, you saw that in equity markets when Trump delayed the Chinese tariffs until later on this year, from initially the 1st of September. But then the day after was when the market really got crushed, and hence then further bids into fixed income in the flight to safety, just pressuring yields even further in the long end and subsequently causing the inversion. The curve though, as a statistic, goes from trading with a positive slope to inverting. Experience from the The 5 inversions over the last circa 40 years suggests the curve will flatten further over the next couple of months. There's kind of a couple of, uh, pieces of context I wanted to provide you. So the point being here is that what history would tell us is that now that this has happened, it's likely to continue to happen for the next couple of months. Now, one thing that this is leading to, as we have— this is one of the biggest or interesting parts of the new period of the long-term kind of business cycle that we're going to go through. Because if we are in a late phase and we're heading into the recessionary environment, the difference is, is that, you know, the world's never been this much in debt. And certainly the unconventional methods of stimulating an economy over the past 10 years by using things like quantitative easing have really kind of almost artificially misshapen the curve. If you're going to buy copious amounts of bonds, then ultimately that renewed demand for bonds is going to pressure yields further. That was the point really of quantitative easing. But the point being though, if we're going to go into the next phase of an economic downturn requiring more stimulus, well, that then is why we're getting this further push in the long end. And subsequently now, as people get more pessimistic, the long end is outperforming the short end and the yields are decreasing and you get the curve bull flattening to the point of then inversion. So negative yielding debt, every time I tend to look at this chart at the moment, it's just a quite a frightening prospect. So negative yielding debt, when Tommaso was talking about it to me only a couple of weeks ago, it's basically added another half a trillion or so, as it does. So we're now up to around north of $16.5 trillion. And the most interesting thing here is how rapidly that's shot up through 2019. It's been incredible. It's gone from— it's basically doubled the amount globally. And so this is kind of the testing point of which central banks are going to face going forward into the future. Now, talking of the curve though, a couple of banks have said some interesting things, and, and this is one out of JP Morgan that I thought I would share. They said the yield curve message is distorted but risks remain. And again, they're looking at distortions for the same kind of reasons that I was just suggesting a moment ago about the, the fact that we've had an unprecedented era of unconventional policies, which means that really this, this time really is different, um, as cliché as it sounds, from these previous post-war episodes of when we've had these kind of indicators that signal a recession. Now, one interesting point I think that JP made was this, as I bolded: Treasury inversions are less a reflection of US recession risks and more of a reflection of the desperation for yield by foreign investors flocking into the US dollar-denominated bonds as yields turned more negative in Europe and Japan. So if you think about it, those yields are way lower at this point, and so you have to go to these dollar-denominated assets, which in, in turn then, as a function of, of trying to find yield or return for investment, forces then the yields in the US to then follow suit. In not what is an underlying reflection of economic stress, but more a function of the movement of portfolio flow in that sense to still hold bond exposure. So then that's one of the key things I thought. The other thing as well is that I don't think it's so much about the curve is really showing the stress right now of an immediate looming of a recession in America. I don't really think the data supports that. But the point being is it's about the managing now of the investor perception of a recession, I think, is more of a threat than the actual underlying economics at this point. So again, in short, uh, I do think that this inversion, as I was kind of saying back in March when a different part of the curve did the same, I do think this is a little bit overhyped. I do think, yes, last week was a bit of a capitulation of people really buying into that, that story. And so this morning, I think the market right to have a bit of a pullback from what otherwise was a bit of a tough week for markets globally. Okay, looking at a few different things, this is the final kind of point I wanted to make about the inversion. This was quite a different point of view actually from all the negativity that I was reading. This was quite a large bank out in the Far East based in Singapore, DBS, and they were talking about US equities have historically traded higher 6 months after the yield curve inverts. In fact, the S&P 500 has registered gains of 9.3% on average after this type of thing tends to happen. Another stat there, Credit Suisse, a recession occurs on average 22 months following such an inversion. And lots of— actually quite a variety of different banks talking about different time frames. But the point being, from a, you know, if you're not used to this, if you're not— if you're new to markets, that it doesn't necessarily, you know, the inversion doesn't happen and the recession happens next week. There is a quite protracted, drawn-out period. Now the interesting thing about this, of course, is that there's this small thing about a US election happening at the end of next year. And if you actually think about the timing, if that's about 18 months away, that's right in the kind of sweet spot where if the inversion happens now in the 2s, 10s, it should be hitting right at the moment of when Trump's going to be looking to secure a second term. So that's what's going to be ultimately really interesting over the months ahead, how he tries to manage that situation. Talking of the man of the moment, Donald Trump. As I said, you've got a G7 meeting in Biarritz in France happening at the weekend, so as much as he will be commenting about China, I would imagine as we get further into the week he's going to be more and more tweeting about Europe. This is normally his tactic going into these big kind of meetings with all the heads of state. He goes in quite aggressive because he really wants to send a message to them before the face-to-face talks. He said last week, just to refresh your memory, the European Union is worse than China, it's just smaller. It treats us horribly— barriers, tariffs, and taxes. So, you know, holding nothing back there. The other thing, of course, that's going to be particularly interesting is Boris Johnson gets his first kind of outing on the international stage, and he's committed to delivering Britain's exit from the EU, as we know, by October 31st deadline. So it's going to be interesting to see how Trump has been very much politically aligned because it's within his matching of an agenda about taking back control and making your country and your sovereignty great again. So he's been very much a backer of Boris Johnson. Be interested to see how that goes down, uh, the G7. And then Trump is also in the middle of a 6-month delay in deciding whether to impose tariffs on auto imports, obviously a huge deal for the likes of countries like Germany, of course, which would mean that decision could come on that particular area in mid-November. So again, more potential stresses to come for Germany and Europe as, as kind of Trump pivots away from China momentarily. The one thing that you're probably likely to hear Trump talk about quite a lot is France's fairly contentious digital tax, which targets 3% of large tech companies' revenues from digital activities. Now this obviously is targeted at people like Facebook, like Amazon, Alphabet's Google, and so on. And although Trump himself has been not exactly the biggest supporter of these big tech companies over recent in this administration. Certainly France, though, penalizing American firms is something that, of course, the US president's not gonna like. So again, if you're trying to ascertain the type of areas that he's gonna pick on, these would certainly be one of them. So Trump, definitely more to come, of course, this week. Other things still on the radar: Italy. So Tommaso's just come back. I'll get the latest update from the man himself on the ground. I'm not sure though if the, the rolling hills of Tuscany are the place to get the, the latest political insight. But you can see here, I thought that I would share this. This is a reflection of Italian 10-year bond yield, and this is looking at the spread over the benchmark German Bund. So again, in a most simple sense, what tends to happen is that all European yields are benchmarked against the German 10-year. And what we look at then is when we get these political flashes or economic stress, the, the relative country in question's yield starts to rise to price in, um, that reflection of that, that negativity. And what tends to happen then is you get a further removal away from a static benchmark 10-year yield to a rising Italian or Spanish, whatever the case might be. So the wider the spread in that instance, the more uncertainty that has created. And so what you've got here is an explosion in the spread that happened after the political crisis sparked a bond rout. That was back in kind of Q2 of 2018. It's remained elevated really ever since. The latest episode that we had was Salvini pulling the plug on the government. Now the reason why I mentioned Italy is because the PM Conte addresses the Senate on Tuesday and And of course, we're just keeping an eye out for what the latest is because Salvini's already called for the breakup of the existing coalition. Five Star politicians themselves have talked about potentially looking to now form a new coalition, then dropping their partner League and instead replacing them with the Democratic Party. So whether or not there's enough political appetite to get that over the line yet to be seen. But the thing people are looking out for here, of course, is the potential and timing around a snap election. The risk, of course, that would see this spread balloon, i.e., move back up higher to retest. And this kind of sweet spot here, line of stress, if you like, is 300. That then would be along the period of whether the league in that instance of a national election in Italy were to prove as strong as they are in the polls, which is just a whisker off getting a majority themselves as a singular party. Other than that, whether or not they would team up with the Brothers of Italy and so on and so forth, those would be the most negative in terms of the impact on Italian assets as a result. Okay, quickly looking at other things. I said Powell— Powell is the main event undoubtedly for this week, and it's not coming till the end of the week. There are certainly some other things to, of course, look out for. But Jerome Powell, he has this Jackson Hole Symposium every year. This was, you know, the reason why people really look at this quite closely is because back in the Bernanke days, he came out and he made quite a really important statement, which did give very much the latest change in monetary policy from the Federal Reserve at the time. And so people look at this as a, as a platform for the Fed Chair to really give an insight into current economic conditions, but also give the latest clarity about what is it that the Fed intend to do then going forward in the future. So it's like an update, if you like, from the previous Fed meeting, the latest projections, and so on. What do I think that Powell's going to say? Well, actually, I think he's going to, as per usual, I think he's going to play a fairly even hand. I don't think he's, he's going to draw too many conclusions from this yield curve inversion situation, which I'm sure the press pack will be pushing him on. The Fed before recently have said similar to what we've been discussing that actually the curve has been influenced by other factors this time around. So there's no need to really panic just yet, although they'll probably say something on the lines that they continue to monitor all market developments, both internal and external, and respond to incoming economic data. The usual kind of line, I would say, will probably apply. So with that being said, just given a lot of the movements, if all things were to remain equal in, in generally market perception and positioning, I think that then by default could leave the doves a little bit disappointed. If they were looking for Powell to really step up to the plate and start committing to 50 basis points in September, I think you're going to be strongly disappointed because I really don't see that happening. Market tends to agree as well at this point. We were looking at the federal funds rates Fed futures last week. And if you remember, this number was getting kind of close to 30%, that being, uh, this bar on the left-hand side, to take the Fed funds rate down to 1.5 to 1.75. That 30% reading has now dropped to about 12%. And so overwhelmingly, the market expectation is for a cut, but a cut of just 25 basis points, to the tune of about an 88% probability at this point, obviously subject change. Final thing, just switching over to the UK, a little bit of a dip actually in the pound here more recently. I'll let Sam go into that with more color, but Corbyn is the main kind of headline story, gearing up for an election. The Labour leader vows everything needed to stop a no-deal Brexit. The kind of headline here from, from Jeremy is that we'll promise to do everything necessary to prevent a no deal. He's going to give a speech today that will renew the pledge to hold a second Brexit referendum if a general election is called this year. Nothing really new there, I would say. The problem isn't so much this idea that, you know, because Jeremy's now saying this, that means that's it, you know, Brexit's off. It's more of a challenge to Boris. The parliamentary arithmetic, as much as it's problematic for Boris now, given it's only up 1 technically, and hence the reason why he might want to call this election in order to gain a more stronger footing in the lower house of Parliament, the same principle can be applied to the Remain contingency. And that is that there's enough people in the Labour Party that would still vote to leave, even without a deal, and that would go against the party line. So that means that Labour would need the support of other pro-Remain parties, that being the Welsh Party, the Greens, but most importantly the Lib Dems. And the problem is the new Lib Dem leader, Jo Swinson, has said that she would not back Jeremy Corbyn. Now if the Lib Dems don't back a Corbyn-led caretaker government in the case of a vote of no confidence against Boris Johnson, well then it's dead in the water anyway. The thing that really needs to happen here for this real Remain alliance to potentially change the direction of Brexit is you've got to get rid of this guy. But the problem is this guy is sticking around and he he is showing absolutely no signs of leaving. So, yeah, it's still very much up in the air how this is going to play out at this point. But you get my point, what I'm saying with the performance of a Remain alliance. Just because he's now stepping up and talking about a second referendum and so on, the point being is there's a real lack of cross-party unity that really have faith in Jeremy Corbyn, which could be a massive stumbling block. And if then, bottom line, the pro-Remain parties cannot get together to basically elect then an interim Prime Minister, well then Boris Johnson, technically speaking, could say, "Well, if they can't do that, then it's my right that I don't need to resign." which would normally happen in a vote of no confidence against the government, because the opposition can't form anything concrete, and therefore, even though I've lost a no confidence, I will remain Prime Minister. So, you know, could end up going that way as well. Lots to be, to be seen. So that's it. Let me just quickly wrap up then. So for today's calendar, very quiet, nothing major going, coming out. I'd say much of the action really comes later into the week. Overnight tonight, if you're trading the Aussie, just keep an eye out for the RBA minutes. And then, as I said, Italy may be back in focus as Conte appears in the Senate on Tuesday. Wednesday, do not forget, on Wednesday— I'll need to just correct that— the Amplify Live session is happening here on Wednesday. It's gonna be on Wednesday night. Thursday. So Sam and I will be doing a live session on our Amplify Trading YouTube channel. We're gonna start at 6 PM London time. It's very much an open Q&A format. What we wanted to do is we're gonna open the floor to you guys, our subscribers. We want you to lead the discussion. I've put a couple of feelers out to see, to get the ball rolling. A lot of you want more information about this whole whole yield curve story and negative yields, definitely we can cover that, but we can cover anything else that you want to as well. On the night, it's going to be me and Sam responding to your questions as we take them. We then will finish that session with the full real-time coverage of the FOMC minutes, which will come out at 7 PM. So that will bookmark the end of the session. I can give you a bit of a buildup, how I would go about approaching that type event, then we can analyze it as it happens. Sam can kind of review it from a trading perspective. Uh, if there is the opportunity to trade, I'm sure he'll share those, um, and then we'll wrap it up. So that'll be Wednesday night. Thursday, ECB minutes will be key, and then of course, um, Powell on Friday is the big one. All right, that is it from me. Let me hand you over to Sam, and I wish you a good week ahead. Thanks very much.

Hi guys, hope everyone had a good weekend. And we'll just start off with the, uh, the pound. As Anthony mentioned, we just had a bit of a drop down really from 8 o'clock. So that volume coming in from the London opener, we've had a push below the pivot, finding support on that first test back to what was the morning high around 8:30 on Friday. So that remains to be a key level and is one I've had written down before, around 1.2444 on the futures. So keeping a close eye on what happens around there, and not just this level. And I'll come back to the pound in a moment. You've also got euro-pound and having a look at last week where we, you know, couldn't quite get below the low. So coming back to that first test back of what was the low of the 31st of July. So this market very much a key level of support, one to have marked up. And the reaction from that, you're starting to see a bit of a reversal here. And if we can get maybe above the low that we had back on the 15th, you could expect some further push to the upside. So both the pound and the euro at relatively of the interesting points, uh, overall. But the Euro Pound more so here with that low of the 31st finding really strong support last week. Back to the pound more intraday and having a look at another test of this point now, a breakthrough that I don't think it's out the question to, to get us down 20 ticks or so to an area of support that we had on Friday before the S1s and potential trend lines come into play. And for, for this market overall, technically, we're just having a look at it. It's, uh, it's been relatively choppy as of recent. Obviously that 120 still marked up here and worth having on, even though we're now a lot further away than where we were last Monday when we did the briefing. Um, and I would just be— I think there's better markets to, to trade, of course, but opportunity-wise may well the best opportunity, I should say, may well happen later on in the week. And if there is some dollar strength to come with some pound weakness, break of this trend, and then really looking to attack that low that we had of the year. But other, other than that, for the pound, you've got quite a lot of resistance. Obviously the double top that we had this morning remains key around the R1. You've got quite a, a lot of resistance going back to the beginning of all August as well. Uh, having a look over to the euro. So we had this morning— I'll just bring in this whole chart— we had, uh, a nice— we've got trend on— had a nice break of this trend that you see going back starting here on the 13th, 14th, 15th. Got a breakthrough and retest. Let's make this bigger now. You you can see of that this morning. We had to push through around 7 AM, retest, pivot was good, and since then we have pushed higher. So worth keeping an eye should we get any further retest of that. Obviously above where we're trading, you're looking here at yesterday, or Friday's I should say, afternoon and morning, uh, high, uh, 1.1130 is key. The R1 again has some nice levels like the pound does as well from previous sessions. Uh, would also be interested should we get, uh, you know, real confirmation of this trendline break, what happens around today's R1, 1.1160, but also a nice double bottom before push through that we had on Thursday following those ECB comments about, uh, their next sort of stimulus package, uh, or how the market perhaps isn't pricing in accordingly. So that area, if I just draw an X around there, would be be pretty key for me to, to see what happens. Alternatively, to the downside, I'll just move this above— well, just the right-hand side of the, uh, the, um, the camera. It's like with the pound, just having a look. I know it's not necessarily a trend line yet, but potentially on that dollar strength and opportunity-wise, looking for those yearly lows, break of that trend later on in the week. Of course, if, uh, could— could also be an opportunity. But for now, I think with the trendline break, looking to see what happens at these higher levels for the euro. S&P had a decent, uh, open. Uh, we're finding resistance on, on what is a really key level from last week's trade. You can see we just found really nice support 13th and 14th before that push through. First retest of that at 2920 is how pretty well putting this longer term, well, just showing more days, that August low that we had seems quite far away now. To the upside, you know, if we were to get through this, this level, which is obviously key, then you are looking towards 2940, which is again a very important resistance from the 13th, from the 8th, and also the 2nd as well. To the downside, if we were to— and this is likely to happen, were to have tweets from, from the trade war, both sides, then you could obviously see a negative impact. And I'll be looking at this trend to, to break, but also you'd have to really get through the, the high that we had on Friday, which really, uh, acted as, uh, well, didn't really act as resistance this morning. Overnight, as we pushed through to 2894, retested that trend line, that's when you could start to think about maybe things going to the downside. Understandably for all equities though, just coming off a touch in the US. Let's bring in the NASDAQ here as well. Similar, uh, price action. It didn't quite necessarily make the exact level that the S&P did, but you can see they're all just coming down a touch. Same for the Dow. Looking at these, these trend lines to see how well they can be respected should we come back to get a test of that that. We'll go into a bit more detail longer term, uh, for equities. But just for the S&P, uh, as market itself, just have a look at how far away we are from that all-time high. Just under 4% from where we're trading, so not too far. Having a look over to gold, uh, worth having on the trend line from Friday's high to where we, where we're trading now. You can see that just getting squeezed in a touch. Really solid base of support going back from the 14th and then each day after that, including this morning. Bit of a zone you can argue now as well with the, uh, the S1 1513 highs that we had back on the morning of the 14th as well. So nice early morning opportunity either way. You, you get a feeling here, uh, just have a quick look and see if that's worth having on. So price getting squeezed and obviously had that spike through on the 13th, uh, which was, uh, last Tuesday. Really strong push, but then rejection, uh, down. See, as equities were recovering. So I'll just be for, for the gold here, waiting for either a break higher, uh, probably more favorably, or lower underneath S1 1513 to target down towards the lows of the 14th. But for now, price just getting squeezed in, and certainly looking over the last few days, not too much is really happening there. Oil, however, I do quite like the, uh, the trend line. And if I just drag this again to make it smaller, going from the, uh, the July highs, you can see just nicely respected on, uh, the 13th quite well to get that third test. That's something I would have on for the remainder of the week, or until if we can get up to to test that point. Pretty, pretty key, uh, trend line to, to have on just above where we're trading. You can see, and we've just come off the touch and made this, or just about to, to make this potential trend line here. You've got those, uh, highs from the breakdown that we had back on the 14th, and then of course, uh, what will be quite a key level up in R2 with the previous support on the 14th before we did have that big day to the downside. Like with gold, just relatively choppy last couple of days, but certainly if we can get above this whole mini range of the last couple will be pretty key, uh, you can feel going forward. To the downside, quite a lot of support. We just could not get through, uh, around $54. We tried on the 13th to 14th to 15th and didn't quite get down to 16, but really solid base. Also, you could argue worth— again, we like with the euro and the pound, if we were to have a push to the downside, worth having a trend line on from that low the 7th, just to see what happens should we come back to, to test that at any point. At the moment, that looks like it would come in around $55. Quick look over the DAX, which you can see as well, uh, hitting some resistance from the similar day that the US equities have. Haven't quite made it up to maybe the initial low that morning for the breakthrough. That's just coming off a touch after a strong initial push. Worth keeping an eye again, like with the US ones, just on these trend lines, which you can see is slightly better respected as well. You already got those free tests on that, looking to come in around the R1 as well. So worth keeping an eye what happens with the DAX and Eurostoxx is coming off the touch and how that could impact US equities as well. Any questions, as usual, please, uh, do let us, us know. The, uh, the data calendar today relatively quiet before picking up a bit into Tuesday, Wednesday, and Thursday. Hope you all have a good trading day and a great week ahead.