The Trading Week Ahead: 28th Jan - 1st Feb 2019

Okay, very good morning. It is Monday, 28th of January. Hope you had a fantastic weekend. Quick overview of the week, as you can see here to the side, we've got Monday through Friday, and obviously it's an exciting week on various different reasons, whether it's earnings, whether it's politics, whether it's economic data, central bank speakers. We've got the full monty, so to speak, coming up over the next couple of sessions. So Rather than really talk too much about the technicals, Sam's going to put together that side of the Amplify Weekly Strategy Report, which will issue to everyone and online later on today. So I'm predominantly just going to talk about the news, give you a bit of a recap of what's happened at the end of last week, over the weekend, and my thoughts for the week ahead. And then, as I say, I'm going to focus on the fundamentals predominantly rather than the technicals, which I'll leave you guys to crack on with. So as we always do on a Monday, we just have a quick— we kind of start and finish with this calendar of the major events that are coming out. And I have underlined here the kind of main ones with bold and underline, as you can see. So today's session, a couple of things in particular that we're looking at: ECB's Draghi, but we're going to talk in a lot more detail here, is about the US-China are holding— these are kind of advanced talks ahead of then the major trade advisors which come to the table later on in the week. That'll be on Wednesday and Thursday. So you basically send in your envoy now to start laying the ground, going through some of the nitty-gritty before then the more heads of state, if you like, the Vice Premier of China arrives. So that's kind of the key things for today. Tomorrow, UK Brexit vote, of course, we'll talk about that in a second. Apple as well had a bit of a rough ride over the last couple of months after pretty much as soon as they hit that $1 trillion valuation, it's been— the only way's been down basically since then for a variety of different reasons. But Apple as well as Microsoft, Facebook, Tesla, Alibaba, they're all reporting this week. And obviously this is very important, not just for some of those which are very large companies, but just given their sector and sensitivity to market movement, as we've seen technology particularly hard hit over the period of November, December of last year. And then some of those other names, those kind of growth or momentum-related stocks like Alibaba, Tesla, could be quite interesting from the sentiment point of view. And then not forgetting, you've got an interest rate decision coming out from the Fed. Um, we'll have a look at that at the end. But then from China, more economic data of significance as we try to ascertain the pace of their economic slowdown at the moment. We're going to look at some numbers which came out overnight in a second, but on Thursday we get the latest manufacturing, non-manufacturing PMI data. We also get the Keijin reading on Friday, so that'll be Thursday, Friday. You've got preliminary flash GDP coming out of the eurozone, that'll be on Thursday morning. This is obviously quite critical just given the weakness that we've seen in recent data, the PMIs, the forward-looking numbers that we had last week definitely showing a deterioration in confidence, whether that's for the variety of different domestic and also Brexit-related political risk to the area. As well as threats of trade wars, because obviously this goes beyond just China, but that also targeted the US and the single market. So, you know, the flash GDP reading, preliminary number from Europe, will be quite key. Friday then, just to round things off from what I've just seen is a very busy week, you're going to get first of the month, so we get nonfarm payrolls. And of course, we're going to be looking out for any type of impact that the, the government shutdown, which of course was a record— what impact is that going to have on non-farm payrolls? And actually, given that fact, it's probably going to be quite a tricky one to, to really trade if you were going to do so, because of the fact that now that government has had a kind of temporary solution and we kind of— the can's been kicked down the road. Well, any impact on the underlying data, whether unemployment might have actually gone up, not because of federal workers not being at work, but because of the subcontractors then that kind of net work with government not being in work. So there's lots of nuances with the data which means it might just be brushed aside other than the volatile kind of initial movement that you might see. So yeah, that's the kind of week in summary. So let's just talk through some of the key stories. First of all, let me just flick over to the charts just to see how things are looking this morning. We have a slightly positive dollar index, so both major currency pairs top left and center on the top, that's EURUSD and Cable futures just backing off slightly after a fairly sideways price action seen since the overnight session. Cable back to pivot, basically sitting on that 132 handle here. EURUSD also just edging down, lost about 18 pips at the moment. US equity index futures also just giving back some of the gains that were seen towards the latter part of last week. Obviously, the trade wars is going to be quite key, and European index futures likewise have followed suit. We generally had a positive open in Asia, but it kind of deteriorated as the session went on, and I'll get into some reasons as why that, that did happen. And then oil prices are lower, we're down about a dollar here, this bottom center chart this morning, um, trading at $52.71. And so with this kind of very mild risk-off developing, uh, gold's up about $2 after that phenomenal punch higher that we had on Friday, uh, taking us all the way back up to that psychological $1,300 handle, which is where we kind of sit at the moment, uh, and T-notes flat up to, uh, 1 tick. So just getting up to speed what happened at the end of last week, this was one of the major headlines of course, um, was that essentially on Friday a bill got signed, a temporary end to the 35-day partial government shutdown, um, that dragged on because of the, the kind of issue about the funding for Trump's proposed border wall. That then ending the longest shutdown in US history. The problem is though that Trump's already come out, and even though some are saying— and it was quite interesting because we were talking about this in the briefing on Friday— how Trump's popularity had taken a severe hit on the back of this extended shutdown and the multiple paychecks that had been missed by these federal workers, his popularity dramatically fell over that period. And such is Trump and what really drives a lot of his strategic moves. You know, his favorability as president is obviously quite pivotal for him. And so a deal has been done. A lot of saying that it's kind of the Trump coming off his, his pedestal, but he's obviously come out over the weekend just to be clear here in the Wall Street Journal that another government shutdown is certainly an option, as he expressed skepticism over Congress would reach a deal to fund the border wall he's requested. So that came out on Sunday. So any harmony over the situation relatively short-lived, and obviously him tweeting out similar rhetoric following this journal release. So yeah, much as the case always with government funding, it's kind of a temporary solution. It averts then a kind of a situation exacerbating and really weighing on markets from that point of view. But ultimately, it is simply just a delaying of this inevitably coming back in another few weeks or months' time. For the moment though, as we've seen from that calendar for the week ahead, what really is quite key is that all focus now will return back to the trade war. Now that this has been done, You know, you could imagine the double whammy risk that Trump could have ran into, which was trade wars don't— the discussions this week don't work out particularly well, i.e., not much movement, which the markets are highly sensitive to. And then if you had a continuation of a government shutdown going into day 40+, you know, that could have been quite powerful as a negative force for global markets. And, you know, maybe Trump was aware of that. The negativity this morning— the other thing that's happened is there's been more evidence of a weak, further weakness in the Chinese economy. I mean, overnight there's been a couple of new things. A new head has been appointed in terms of their push for regulatory reform. There's been further liquidity injections from the central bank. But these are all kind of things that happen on quite a regular basis. On the latter point, The one thing is in the hard evidence, is which what we're closely monitoring as to the speed and depth of the slowdown in China. Well, this is the manufacturers' profits. China Industrial Enterprises' total profits came out last night and they've dipped below zero into negative territory. And as you can see, that hasn't really happened. We haven't been below the dotted line, if you like, since 2015. So not surprising news, but further just adding to the kind of just general situation about people's, I guess, pessimism about Chinese and net global growth and appetite going forward. Knock-on effect, of course, that that has is on the demand side for things like commodities, and particularly crude oil. There's a lot of question marks then about global growth prospects as I just mentioned. And as I said, oil is down about a dollar this morning. But if you're talking about supply and demand, that's then talking about weakness in the demand side. But on the supply side, what we had late Friday— not sure how many of you stick around to monitor the numbers— but Baker Hughes, an energy service firm in America, essentially updates every week about the number of operational rigs in in the US. And actually, in a sign that US output, which has already recently been up very close to 12 million, obviously record levels, US energy firms last week raised the number of rigs looking for new oil for the first time in 2019 to 862, adding an additional 10 rigs. So, you know, US definitely continuing to to bring more oil online is the expectation at this point. So increasing supply, diminishing demand, and consequently you've got a little bit of a pullback this morning in crude oil, uh, through the Asia session and to where we are this morning in the European open. Okay, moving on. Unfortunately, we can't go, um, anywhere further without talking about Brexit. So let's just quickly have a review of what the situation is, then we'll have a look at a bit of a timeline, what to expect from the trade talks, and then we'll wrap things up. So this is the kind of headlines— obviously Tuesday is the, the key date for sterling traders this week because this was the new date after the meaningful vote, if you like. The plan originally from Theresa May just failed miserably. And so this is kind of the next potential Brexit pivot of where do we go from here. So there's two basically key battlegrounds that are being contested this week. One is that from the pro-EU members of Parliament to delay the exit date to stop the UK falling out of the bloc with no deal. So, you know, if this gets passed, it'd be the beginning of a long parliamentary battle to put Brexit on hold. Just so you're aware, in The Sun newspaper, they've reported that the Prime Minister has privately told the cabinet that she will not allow the country to leave without a deal. This has not come directly from Number 10. This is citing unidentified people familiar with the discussions. But as you've seen with the Brexit news and how it tends to come out, there's these rumors tend to be on point, particularly the chap who leaked this one in The Sun. He's, he's pretty well informed. So that's no real surprise. I don't think anyone's really taken aback by the fact that a no-deal is going to be averted. That is the predominant reason why the pound has accelerated its gains and why we're trading a 1.32 handle, having moved higher over the course of the last couple of weeks. The other thing, though, is the Eurosceptics in May's own political party, of course, are demanding she go back to the negotiating table to seek an unlikely rewrite of the most contentious part of the deal. And you know it, it's the Irish border. Now, on that point, Ireland reiterated on Sunday that it will insist on a guarantee of an open border to ensure there's no return to violence between the north and the Republic. Neither the EU nor Ireland would accept an escape clause from the so-called backstop or a set time limit, according to the Deputy Prime Minister of Ireland at the weekend. So kind of going around, feels like a little bit in circles here. I guess then we move on to, well, what is the next part, which is, well, how are Europe going to respond to a request to delay Brexit. That's the headline of an article in the FT, and I just wanted to read a couple of highlights from it to give you a bit of context of potentially what we're looking at going forward. Now, if they are going to move the exit date— this is the March 29th, which is the elapse of, as it exists at this present point in time, of Article 50— if they are going to move that date, it needs unanimous support from the 27 remaining EU leaders. Everyone's got to be together on this from the European side. Now, Michel Barnier, who's the chief negotiator on behalf of the European side, has said that EU leaders will need two questions to be answered quite simply. That is, why do you want the extension, and then how long? Now, the easiest scenario for the EU is a technical delay. Now, what this would mean is to allow Theresa May a few extra months to ratifier package that could command a majority in the House of Commons. But don't forget, Theresa May got absolutely battered in Parliament. She lost by that margin of 230. So the likelihood of that is, I think, pretty slim. The best grounds for a longer extension from 9 months to a year also seems unlikely to emerge imminently. EU leaders say they will make time for a UK election or referendum, but MPs seem way off from turning back to break the Westminster deadlock at the moment. Although, you know, a lot of that expectation, obviously chatter about a second referendum has grown, I don't think we're quite at that point as yet. Now, any extension bid will probably be coupled with a renegotiation request. This is the kind of dilemma that the EU face, and the realism of the demands will be a big factor in deciding whether and for how long to prolong Britain's membership. Now, one senior EU diplomat has said it would be dangerous to draw out the process since it would allow populists across Europe to claim Britain were being trapped and that will claim that the EU is a prison. I'm not going to go into it in this briefing, but Italy and France having their own relationship tiff at the moment, but to a level of which hasn't been seen for a very long time, and this is kind of centered around a similar kind of issue to this. Now, one thing to be aware of here from a practical point of view is there are European elections in May and the inauguration of a new European Parliament happening July 2nd. So if you're trying to ascertain what you think an extension from a time point of view could be, these are actual, uh, quite big technical milestones in the near future, which means that any extension, um, could well likely be pushed up to that point to then be reviewed again. Now, if the UK remained a member without participating in the elections, it would raise questions not only about the disenfranchisement of the UK voters but the legitimacy, uh, of Parliament in itself. So yeah, quite a few key things to measure here. One quite, I guess, more realistic route to go down for Europe is a conditional extension. If the EU thinks Britain is making unrealistic renegotiation demands or has no discernible plan, EU leaders could delay the exit date all the same but say that delay is purely for no-deal planning. So even if, you know, everything remains the status quo, they could in effect, still extend it, but just so that there's enough time to adequately prepare for no deal. But then, you know, Theresa May's already saying behind closed doors, is what we're hearing, that that's unlikely to happen. The second option is to set constraints on any future extension requests. So some Commission officials have suggested European Council, for instance, make clear that another extension is impossible unless it's for a UK referendum or a general election. So it's kind of saying to Britain, okay, yes, we'll go again, we'll extend to here, but you're not having another extension just to kind of heap the pressure on unless it's for a second referendum or general election. However, I'll leave it with this: one veteran of EU summits said his expectation was a terse statement on extension that would be short but extendable as long as certain conditions were met. They don't like closing off options. And I think that last point is quite key. I think this is where, you know, it's kind of a game of brinksmanship to a certain degree, because one thing that Europe— that idea of them saying, okay, we'll extend, but you're only on a condition of it— if it's to happen again, it's on an election or second referendum— would they want to do that? I'm not sure. I think they would want to hint towards that potentially as the way that they would go, but such is the case with any negotiation, you always want to keep options on the table. So yeah, I mean, that's the kind of state of play. Tomorrow, I'd imagine, the way that these things tend to play out, it's going to be late afternoon, early evening is when we start getting the bulk of it. We'll have more details of timings specifically tomorrow. And as I said, I'm not going to look at the chart at the moment. I'll let Sam kind of go over that and highlight the key levels when we issue the strategy report. Okay, back to quickly the trade war. There is one thing or a couple of things I just want to quickly run over, and that is what is people's expectations for the trade war. We've highlighted the fact that we think it's very important. And there's a couple of other things, or I guess a little bit of context to provide as to ascertain what is going to move the market if that's going to be the case. Well, one thing to be sure of here, we're not looking for the kind of, quote, deal this week. This isn't about a kind of final deal, signed, delivered, therefore trade wars over. This is more about positive signs of what can be agreed at this point as the best foot forward is, is kind of the, I guess, the, the best-case scenario. Now, the base case would be a broad outline of a deal that are clear to this point, that Chinese will probably agree to buy more American goods, which they've already kind of committed to somewhat so far. Beijing may promise to stop stealing intellectual property, and the two sides could develop a a workable enforcement system to give the teeth— or give the deal some teeth. If officials indicate that they plan to hold another round of talks, that would be a sign that the two sides still think a deal can be done before March 1st, which was obviously when this $200 billion worth reverts up to 25% from 10% tariffs. So even if they're not willing to lay out the whole package, just the fact that they're willing to hold more talks before that deadline, uh, would be seen as a, as a, uh, a positive. Another possible outcome if the sides agree to meet again, of course, would be an extension of the tariff truce, which I think is a fairly high likelihood of that happening, just to keep the pressure on, you know, talks progressing and moving in the right direction. Better to just then again kick the can down the road, add another month or two, continue the talks, and therefore manage some of the, the market fallout, of which not just Trump will be particularly wanting to keep the equity market propped up, but China the same, given the economic pain it's going through at the moment. So that's the kind of base case. The best case, which would see a pretty, I think, extreme risk-on equity rally, uh, in that sense for sure, would be if China comes to the table with an offer on economic reforms that are more ambitious than expected. The US wanting broad change in China's corporate governance, particularly on some of the more complex legal issues like this idea of intellectual property. Now, is that going to happen? I think that's highly unlikely to happen. A, that they're going to do, trying to make such radical commitments and change, and for it to come so quickly. So hence the reason why that would, I'd say, is not priced in, and you'd get a meaningful positive response if that was the case. The opposite of this, of course, is the deal breaks down. If there's no statement of any kind at the conclusion of talks at the end of this week, and Trump fires kind of a string of tweets calling out China with his usual kind of expressions of frustration, if you like, on the lack of progress, then you're going to get the complete opposite reaction with that. So I'd say, you know, good bid tone to the risk assets. So things like the Japanese yen would strengthen, gold would move higher, adding to the gains that it saw at the end of last week. Equities under pressure. if that were the case. So really important for market direction is those talks that are happening. And remember, it's kind of the introductory talks, uh, laying the preparation, if you like, for the key players. That's happening today, and then they arrive, uh, the heavy hitters come Wednesday and Thursday. All right, rounding off a few of the other headlines from the weekend, uh, not gonna dwell on this too much because it's not really having a a major impact for broader markets, but it's something obviously a lot of the papers are talking about. Deutsche Bank, which was, I guess, a potential risk a few weeks or months ago because of the fact of its financial situation was so dire, it was leading to somewhat of a bit of a run on its share price. And so given its systemic importance to the financial system, what happens to Deutsche Bank actually is quite key for the financial system's kind of just its liquidity and operation functioning fully. And what's happened is that, I guess, you know, kind of buying on the cheap, so to speak, the Qatari royal family, which already owns a stake in the German lender, is saying that they're going to commit and they're going to basically step up their holdings in the bank, according to those familiar with the matter. So As a response, as you can imagine, this is the kind of leaderboard of the, the DAX this morning, and Deutsche Bank leading the way. They're up, I mean, this was a price print from earlier this morning, they're up about 2% at this point. So there's some decent gains as well. Okay, the other thing of this week of importance is going to be earnings season. As you can see here, this is a kind of a list, uh, I'll publish this in the chat room in a minute. But it's got the major companies that— the ones which market participants are monitoring from the US earnings season. We've got Caterpillar today, which will be pre-market. It's often seen as a bit of a read across for just their— just given the sector and the products and services in which they offer for global growth kind of appetite. So it can have a bit of a read across for them, just general confidence going forward. So one to watch even from a macro point of view as well as from a micro level. But then it's really technology that's— that steps up substantially. As you can see here, you've got Apple Tuesday, you've got Facebook on Wednesday, and then you've got Amazon headlining on Thursday. We've also got some people like Microsoft as well. So, you know, big companies but technology-focused, which we know has been a real, uh, a kind of sweet spot of market attention over the recent weeks. And, uh, and if they have struggled, then this could just be another, um, you know, kind of negative force potentially for the US equity market. And then of course a negative one from a risk perspective. From a European point of view, um, do be aware you've got SAP, Siemens, and Deutsche Bank. So 3 kind of major German corporations all reporting. So if you are looking at the DAX, then European and UK earnings do start to pick up. No one really major this week from the UK, that will be next week. So yeah, that is it. Final things to say then is really, uh, we've got an interest rate decision from the Fed happening on Wednesday night. Now, just the one point of difference that I want to make, given that this is the first FOMC meeting of 2019— if you'll remember, the Fed have moved to a new model now where over their 8 interest rate meetings of which they'll hold this year, now every meeting has a subsequent press conference. This is brand new for this year. Now, the reason why that's quite important is that historically of the 8 meetings, the 4— so March, June, Sep, Dec— they would traditionally have had the Summary of Economic Projections, so the dot plots, and also a press conference. So the precedence has been that the Fed, the central bank, likes to take action or make a meaningful change to their communication during those 4, because then it allows Powell the ability to communicate to the press, take questions, and to smooth over any policy changes via the press conference format. So really, in history, only those 4 meetings have really been the interesting ones. The alternate 4, not. The difference this year is that now actually every meeting, if you like, could be live. I.e., now he has the ability to talk following up the initial statement. Although we don't get dot plots and projections, he does have the opportunity to talk talk. Now that brings about an interesting concept where the markets have got really big headwinds to tackle, from risks of a no-deal Brexit to trade wars to government shutdown impacts and everything in between. Will Powell now use these alternate meetings as opportunities to update the market with the latest Fed thinking? Now we already know that they've turned substantially more more dovish than, say, potentially that their dot plots currently indicate, which is 2 rate hikes. Does he address this? To how much? To what degree? So on and so forth. So actually could be quite interesting. Not expecting anything explosive by any means, but certainly it will be one to, to watch on Wednesday evening. Okay, that is it. I will let you get on with things. I'm gonna pop a few of these graphics into the chat room so you have them— the calendar, the earnings calendar, and so on. And as I said, Sam's marked up some levels already that I'll include in the strategy report, so I will send that out later. Okay guys, have a good week ahead. Thanks very much.