The Trading Week Ahead: 20th-24th May 2019

Good morning everybody, welcome to the start of the new week, May 20th to 24th. I'm just going to take a few minutes to take you through some of the main points that have happened in the markets over the last few days, some of the main geopolitical factors, some of the main economic news, and also what to expect for the week ahead. Hope you all had a good weekend and I'm looking forward to getting cracking. First and foremost, I'd say the, the main geopolitical story to look out for, as I'm sure you're aware, is the continued hawkish stance from the United States on China. It's a new type of Cold War. The Economist has a great review on it on Friday's edition, and it's really getting into people's lives now, or the potential for it to get into people's lives. There's one of the latest piece of news is that the Chinese phone company might not be able to use Google in its handsets going forward, Huawei. And this is, this is damaging for, for both companies, obviously, as Huawei wants to be the world's leading handset provider. It's number 2 at the moment, just behind Samsung. A lot of the, well, a lot of users of course want all of the Google products on their handsets— Google Maps, obviously the search engine, and so on, YouTube. Um, but also it's bad news for Google because they would miss out on having access to millions and millions of customers, um, on their handsets. So it's, there's a certain sense of a dose of reality coming in with the China-US political situation. Um, so definitely one to look out for and still, uh, something that could, could weigh on, on US equities and Chinese equities. Of course, the way the trend is going Certainly in my opinion, it feels like ultimately I do still believe this trade deal will be resolved. There's so much posturing from Donald Trump over this. He seems to, you know, use the news feed and very short-term motivation to change his pitch and tone slightly. But as these games continue, ultimately I do believe it might need quite a significant correction in US equities. For him to dramatically soften his stance. Obviously securing that second term in the United States being quite closely linked to where stock prices are for Donald Trump. So that's looking at the US and China, that's still going on. Obviously we had an election in Australia, back to the madness of Democratic elections around the world and really, really interesting result. Scott Morrison the winner, miracle win. The infighting in Australian politics has meant that interestingly enough, no Prime Minister has succeeded in serving a full term since 2007. So if you think we've got it here bad with Brexit, which we do, it's not unique to the UK shores. The Australians have had a a particularly tough time with their internal politics. And anyway, the result of that victory showing— if I just transition to show you the Aussie dollar at the moment, a bit of support coming through in the Aussie dollar. The result came through only right at the last minute. So keep your eye out on the Australian dollar today. Certainly reversal of the trend heading into Thursday and Friday. We're above our 2 here. And perhaps finding support levels for a continuation on that movement could be, could be a good shout on the Aussie dollar. Over to Brexit, still not looking good for the Tory Party. They're likely to get absolutely ruined on Thursday's elections. The latest YouGov poll is looking for 9% only. The outstanding winners are very much likely to be the Brexit Party, with obviously just that one very clear— well, I was going to say mandate, they don't have a mandate, but one very clear objective. 9% for the Tories on Thursday. Also on the other side, it might be the Lib Dems that perform particularly well, and that does, you know, I can't really see that clearing up the Brexit picture for the United Kingdom. I'm still quite confused outlook. May's new and approved Brexit deal— so this is going to be the fourth time lucky for Theresa May— her new and improved Brexit deal will be likely to be released on the 1st of June. So get ready for that to be rejected for a fourth time, most likely. And in my opinion, I really do see this going right down to the wire on, or October 31st, and potentially then a no-deal Brexit at that point in time, just as I think the, the public in the UK are becoming worn out by the process. And actually, it's a come-what-may type of attitude. Certainly that's what I'm picking up. Looking at the pound then, how are we responding to this and how will we continue to respond? This— well, the pound's coming incredibly strongly underweight here. We're going all the way back then to the year's low, 2019. Just trying to count the number of red candles here, but it's a good 8 or 9, uh, red candles in a row. So a real trend being set here for the pound. Um, going back, where would we target here? Well, we got this quite strong— we're right on it, to be honest. Can you see these two technical levels? We've obviously got the low here from October and November last year. It was also— came in as a low just around in January 2019, but it's not an insignificant level. And it comes in at the same time as a bit of a weak trendline support here, but it's certainly identifiable. Um, but yeah, listen, a break of 1.729, you could see 1.2700 start to come in as a relatively quick target. That was also the test just here of January's sell-off, as you can see. And then below that, you could look at— ah, yeah, really, perhaps we've got 1.2658 coming in as well. But certainly pressure to the downside in the pound. But it is interesting to try and put this all in perspective, because when you look at the euro versus the pound, actually, really, since the the beginning of 2018, we've more or less traded sideways. So what's happening there, and why is the euro struggling to also hold on to any ground against the United States dollar? Well, a lot of this also has to do with the EU elections. What, what do these EU elections mean for the euro? And I think, you know, people use these EU elections as to vote in the way that— to make a sound about their political view. And one country to look out for in this is Italy. Obviously got parties like the League who would want to disobey EU legislation on things like spending and budgets, who feel very strongly that Italy should have more freedom to do what Italy wants to do, not what necessarily as early Brussels tells it to do. And if you see in these European elections an increase for the support of the right-wing candidates, um, in Italy, then I think you'll start to see, uh, a continued weight in the euro against the dollar as well. So definitely the pound is, uh, the outlier in terms of an underperformance, but it's not just the pound, um, but sort of a lot of, uh, geopolitical uncertainty is, uh, is weighing on. Okay, just to move a bit, first of all, to talk about commodities. I'm going to talk about oil, what's been happening in oil, because we have had seen some support in the oil price again as over the weekend Saudi Arabia reiterated its advice to OPEC that they believe that they've got a surplus of inventory and they want to try and limit further increases in production from OPEC. So oil staying supported genuinely anyway. But we've also got news about the Strait of Hormuz, and those of you guys who have taken oil or advanced oil training session with me would know about the importance of these choke points globally for the transfer of oil. So the Strait of Hormuz Gormuz is that area. I don't know if it's got a map here in the FT. It's the area really right in the action between Iran and Saudi Arabia, Bahrain, Qatar, UAE, where it's only just over 20 miles wide and a huge proportion of the world's global oil output passes through that thin stretch of water. Anyway, reports over the weekend from Saudi Arabia that two of its oil tankers were targeted just off the coast of UAE, the finger of course being pointed at Iran. And it's not just where Iran is in trouble there, if you like. He's also got news showing here from Zero Hedge that rocket fire towards the US Embassy in central Baghdad. And again, I The sort of finger is being pointed quite firmly at Iran here. So on the geopolitical side, it is kind of US-focused. Uh, of one side you've got the new Cold War with China, and I find that fascinating as these two superpowers sort of try and tussle and feel each other out for, for how they're going to continue their relationship. But on the other side, you've got an increased hawkish tone against Iran. And I don't know, these things happening at the same time— Iran being accused of attacking Baghdad and also two Saudi ships being targeted on the Strait of Hormuz. Um, Saudi Arabia calling it the sabotage attack to the kingdom's oil plumbing stations, a crucial pipeline. So it certainly, uh, heating up and continuing to heat up in oil. And you can see that reflected just as you would expect in the charts then, really over the last sort of 5 or 6 days. Uh, oil here, we're looking at US oil, that's WTI, moving from that baseline of around $60.91 where we found support over the last couple of weeks, pushing above the resistance of last week, $63.51. And in my opinion, whilst all this is going on, You got two great supports here, 63.51, which was the high, as I've just pointed out, of the previous week, or 63— it's just below that, isn't it? 63.48. But you've also got S1 here, so it depends how aggressive you want to be. But, um, certainly joining this trend higher would be advisable. You can either take S1 or you can take last week's high. You can have your stop below within this, you know, got a really nice area to have your stop around 63.40 mark, um, because breaking below that you should see a test of the pivot. Uh, certainly looks worthwhile depending on how aggressive you want to be, either R1 or 63.48 as the target long whilst all this continues to grow and continues to murmur in the background. Um, certainly oil taking the lead. Targets, um, 64.70 odd, you're looking at the high back in well, not the high back in April, sorry. You're looking at that test point back in April, $64.70. But I mean, that would be pretty aggressive, wouldn't it? First target for me would be $64, then R2, $64.25. $64.70 might not be achievable today, but keep your eyes on Twitter whilst the atmosphere is like this. You know, you've got the combined factors of the rocket in Baghdad, the two ships being, um, threatened in the Strait of Hormuz. Uh, whilst the atmosphere is like this, really everything, anything can happen. I just want to show you a map exactly why that Strait of Hormuz is so important. I'm just going to bring it up here. You can see here it comes in. Can you see where it is? But in between Iran The UAE just here, it gets just over 20 miles wide. Oman, Qatar, Bahrain, Kuwait, Saudi Arabia. It's a huge choke point. It used to be that almost 50% of the world's shippable oil would pass through this region, and that's why any type of potential conflict within this region would tend to have a dramatic impact on the oil price. Okay, so what about corporates? Looking at company news, a couple of interesting, uh, company news articles over the weekend. Amazon investing in the UK, uh, food delivery company Deliveroo, uh, taking a huge chunk of that investment. It's all about technology and apps. And at the same time, uh, looking at how technology is impacting the car industry is interesting, as we've got, I think, Jaguar Land Rover there results have either just come out or they're about to come out. We're not expecting anything too positive. They've had a really tough time on, on two fronts. Firstly, you know, they— China is one of their biggest markets and there's been a slowdown in sales to China. Secondly, diesel and the reduction of demand for, for diesel engines impacting Jaguar. But actually, to talk about technology, what I find interesting is In order to survive as a large car firm now, you know, it's just that you have to be large because what all of the main names are doing are investing billions into electric vehicles, into the new technology for cars, and you just can't do that. Jaguar can't do that. They can't take on the Volkswagens, um, in terms of the investment into the electric vehicle fleet. So Rumors at the moment of a potential merger with Peugeot, which I think would be really interesting because it's only with that weight that they can really invest in the technology. Speaking about mergers, I'm not sure if there's any, uh, slightly vulnerable or fragile Deutsche Bank investors out there. Um, if you're, if you're still holding on, there may be some hope. Obviously, we had the failure of the Commerzbank merger. It just didn't really make sense to combine to combine two such similar firms, really. It's just a cost-cutting exercise. There's some really interesting research out this morning, actually, about Goldman Sachs and the potential— or it's really the Financial Times is arguing, I would say, that actually a really sensible investment— or, and I really enjoy this story because it does make sense, actually. A really sensible investment for Goldman Sachs would be the total acquisition of Deutsche Bank. Why would that make sense? Well, first of all, you might have seen last year Deutsche Bank brought out their new commercial banking arm Marcus, named after the founder of Goldman Sachs, Marcus. A lot of banks are trying to get back into the commercial sector, back into retail banking, purely for— well, first of all, yes, it's scale and profitability, but also its stability. It really can act as an excellent arm to the overall profitability of the bank's balance sheet. Deutsche Bank have predominantly been solely an investment bank, much like Morgan Stanley. You know, no one here has a Morgan Stanley bank account, um, but if you look at Marcus, then one really effective way that they could distribute Marcus very, very quickly would be through Deutsche Bank. So that's one. The other thing about Goldman Sachs and Deutsche Bank is that, I mean, Goldman Sachs are fantastic at technology. They've got excellent transaction banking technology that they've invested billions in. Deutsche Bank's transaction technology is archaic by comparison. So there's two that makes it look good. And the other thing is, you know, Deutsche Bank is trading now at one-fifth, that's 20% of its book value. So it's trading at 1/5 of the value of the assets that it has on its balance sheet. So if you could find an effective way to use Deutsche Bank's assets and split them up and break them up, then, then it really is becoming attractive. So at $14 billion or so, I mean, that's just 18 months' profit for Goldman. That's it. What a— what an interesting thing. Anyway, it's all, all speculative at the moment, but the you know, the cheaper Deutsche Bank gets, certainly for me, the more interesting that becomes as an acquisition. And that, that would have an impact, as you would expect, a positive impact on the DAX. And if you have a look at the DAX and see where we've gone, well, I mean, really obviously being dragged up by global stocks by the skin of its teeth. We're moving back towards those highs of the year, but to be honest, the last 4 weeks or so have been pretty choppy overall in the DAX, in the German equity indices market. US equities still looking strong, I mean, just in terms of the rebound since the sell-off that we had in late April. You know, you've got to remember where we are exactly. It really is quite an impressive rally that we've had in 2019. So just to consolidate that rally, I don't think is a bad point at all for US US equities. Um, speaking of US equities, we've now had 90% of the corporate earnings out. Do you remember when we were leading up to these quarterly earnings in the United States, we were thinking that actually now that the Trump tax cut is going to be removed, US companies would perform badly? That really gave them a 25% lift, uh, the Donald Trump's corporate initiatives. Actually, we've had 90% US companies perform now, and we see income growth of 0.2%. So, so far it seems like, uh, the, you know, the corporate picture in the US continues to, to surprise to the upside, which is— I mean, it, it is impressive. Um, okay, just to talk about the week ahead, let me just share this screenshot one moment. What have we got and what can we expect? Well, starting off then, uh, today, um, today is going to be probably the quietest day of, of the week as everybody gets settled and into their places. So perhaps looking at oil, that trade I pointed out, given the geopolitical, uh, continued confrontation, would be interesting. Obviously hold out for any type type of tweets from Trump or China. Liven's up a little bit on, on Tuesday with Fed's Powell speaking, so it'll be interesting to see where he, uh, communicates that further sort of, if you like, hawkish, dovish start— or sorry, hawkish, not hike. Um, on Wednesday, FOMC meetings, uh, going back to, to where interest rates play out on the US economy. We haven't seen too much excitement over that, but ECB's Draghi, I'm certainly looking forward to just over the relative bounce that we've had in German data. Certainly only 2 months ago, you know, the outlook on Europe was incredibly moody, moody. And as you know, we've recently, more recently had positive data of economic growth, especially out of Germany. Will this allow Draghi to communicate, uh, a faster path back to normalization. Let's see, really heats up then on Wednesday. And then on Thursday we've got all of the PMI figures coming out: UK retail sales, jobless claims, manufacturing PMI. Thursday is going to be a really, really busy day. And we've also got the parliamentary election in the UK, um, so that will be interesting. I mean, we'll be— there'll be so much news coverage over that. Of course, really, I think it's important for the UK as a signal for where we want to go with these Brexit negotiations. But even if it is an out, you know, you've got— you're probably going to have two outliers, which is the Brexit Party and the Liberal Democrats do well. Does that make— does that actually give any information of what we need to do to try and bring everybody everybody together here in the UK. I'm not, not that sure it does, to be honest. So that's it for this morning's briefing. Uh, not too much action today, as I said, but do keep an eye out on oil given, uh, the news we saw over the weekend. The pound remaining underweight. There is that nice trade in the pound, uh, following the trend lower, as I pointed out, just below that sort of— just towards the sort of 1.27 handle. 2 opportunities there for you. But I look forward to seeing you guys in the room. Have a good trading day and good luck. Thank you.