The Trading Week Ahead: 3rd - 7th June 2019

Okay, so good morning. Hope you had a great weekend. Monday the 3rd of June. I'll leave the football updates to Sam, but as you can see, I'm not Piers. And when he does come in, being an avid Tottenham supporter, when he does turn up to the office in his full Liverpool football kit, including shin pads and full studded boots, check out the Instagram account. There will be pictures. So do not worry. But anyway, just what am I going to cover in the briefing? Well, it's Monday. This is always the kind of plan for today's session. We, we look ahead predominantly for the week as well as the session ahead to try and identify what are going to be some of the key kind of pivot points fundamentally from the scheduled events which could promote kind of sentiment swings and also changes in directions across different assets. So looking very much on a top-level global macro overview. Plenty to go at actually for this week. What I thought I'd do is rather than kind of go through this list definitively line by line, I'll go through a couple of headline stories and then we'll revert back to this and I can give you a bit of a summary. But first things first, of course, this man— I should say this blimp— blip— blimp is coming back. To London. This is of course protests which will be happening across London in Trafalgar Square on Tuesday. This is because it is a US President's state visit happening between Monday through Wednesday, and obviously this is going to be quite an interesting point because Theresa May obviously formally resigns at the end of the week, so she's a bit of a lame duck kind of Prime Minister at the moment. Just sitting in the position waiting for the, the next leadership to take hold. But then you've also got this escalating trade war, what we had last week with China and then Mexico, and then how is he going to strike a tone with Britain. You can already have guessed at the weekend, talking up in a Sunday Times interview how Nigel Farage should be leading the negotiations on behalf of Britain with the EU. So I would imagine you're going to hear a lot of love for Boris Johnson in particular, whose odds obviously took a bit of a hit with his court ruling that got announced last week. I'd expect him to come back to the forefront once he gets the backing. I'm sure Trump will be saying that he would be happy to cut a deal and work with someone like him, as well as Farage as well. So yeah, plenty to come from the US president, but Taking a look at— let's get down to business and what is the general mood in markets this morning. And first of all, let me just transition my screens. You can see here US stock futures have gapped a little bit lower. So just to repeat, on my charts I've got EURUSD futures top left, cable, gold futures top right, DAX future, NASDAQ in the middle, S&P 500 in the right. WTI crude bottom, and then US 10-year futures in the, in the bottom right-hand corner. So in the center screens, you can see here both European and US indices have gapped lower at the recommencement of electronic trade overnight. We've pretty much stayed lower until at least this point, albeit the DAX momentarily closing the gap. Now, one of the main things that, that is happening here that's promoting continued kind of moderate risk-off trade The US 10-year is up 4 ticks, gold's up about $4 as well, respectively. Is the ongoing trade war— this is undoubtedly continuing to be the main kind of driver of markets. Japanese stocks overnight touching a 5-month low as these global trade tensions continue to mount following, as I said, what happened last week. Before I get into this later story about a Chinese white paper which came out yesterday Couple of bank comments. Goldman Sachs analysts on Sunday downgraded their second quarter economic growth forecast for the US because of risks stemming from trade conflicts with Mexico and China. Heard pretty similar from Morgan Stanley. JP Morgan, they've said that there's more downside to come. So, you know, the chorus on Wall Street definitely is taking a decided turn to the downside now. A lot of this has come because since the US, what, 2 weeks ago now, started to precisely target the technology space of China and predominantly Huawei, this is where China now have kind of upped and changed the tone of their rhetoric. And so this is what came out on Sunday. This is basically a white paper where China are ramping up their response to what Donald Trump has been doing. So let me give you a couple of the highlights. The paper says Trump's decision to raise tariffs on $200 billion of Chinese goods was a breach of an agreement already reached. The US has backtracked on its commitments. One side should not cross the other's red lines. China will not give ground on issues of principle. The 11 rounds of high-level consultations have made significant progress, and China will keep its word. So all of this again kind of promoting this idea that, you know, as much as Trump has been saying it's China that's not been making this sufficient room for, for getting this deal over the line, China in fact kind of quite forcefully coming out with a rebuttal to that, saying it's, that's not exactly the case, and it's the US in fact which has broken up these talks. Now, the other thing that's happened is there's been some Chinese data, of course, which has come out overnight, and Chinese May factory activity expanded at a steady but moderate pace in May. Actual number came in at 50.2, expectations were for 50, so very slight expansionary territory. But analysts have been quite quick this morning to say front-loading of exports by firms to the United States to avoid higher tariffs masked the underlying weakness in the economy. So again, still this idea then of, of the impact that this has on global growth. And what is this leading to? Well, of course, this is leading to more pricing in of potential rate cuts to come from the Federal Reserve, despite the fact that they're still, at least at this point in their projections, suggesting they're going to do no rate cuts, in fact keeping rates on hold for the rest of this year. What this chart here that I'm sharing reflects is the blue line is the effective funds rate, the white line is the rate implied by the January Fed funds futures contracts. So as you can see here, as we've gone through this latest development in the past week with the, the kind of escalation of the trade war, if you like, we've dropped again. Now, one thing I was looking at then was the, uh, CME FedWatch, which calculates then going through each Federal Reserve meeting what the market's pricing is in the short end of the curve for the probability of a rate cut. So if we jump back to the June meeting, obviously they're not going to cut rates as soon as the meeting this month, but definitely there's going to be an update to the dot plots, which will be interesting. But if we start going out to September, you can see then that actually the prospects of rates remaining where they are is a much lower probability than that of a 25 basis point rate cut, which would be priced at 44.3%. Even a 50 basis point rate cut now priced higher than rates remaining where they are today. Take that out to December and then there's only a 4% market price probability that rates remain where they are today. So again, definitely the market becoming ever more dovish in its pricing, particularly promoted by the moves that we saw last week and continue to see this morning. What does that mean then for oil markets? Well, you know, as the global growth concerns start to ratchet back up again, WTI posted its biggest loss in the month of May since 2012. So That in combination as well with a lot of the ongoing OPEC+ watch that we're on at the moment with compliance levels and potential supply shocks for the moment being outweighed by this necessity to repricing, uh, this latest ramification that a breakdown of the trade war could have. So that's kind of the overall vibe, if you like, to the main story, which continues to be the trade stuff. So what more are we gonna hear on that this week? I'm not so sure actually, because Donald Trump is obviously otherwise engaged. He's gonna be in Britain for the next 3 days, and I'm sure he's got a jam-packed agenda. And so although he might make the odd tweet here or comment there, I think actually you could see that it might be until the back end of the week before he starts to sort of focus back onto the China issue, at least and also as that looming implementation deadline comes up for the Mexico announcement that he did last week. One thing to be aware of is there is a meeting happening. The US Federal Reserve are basically holding a 2-day conference in Chicago. And just to make sense what this is, this is nothing to do with interest rate decision making. This is where they generally gather every year where central bank insiders will come together with private sector economists to debate how the Fed might tweak things to better meet its dual mandate of stable inflation and full employment. Now, the reason why this could be quite interesting is because of this graphic here. I know it's a bit small, but let me talk you through it. What you've got here is the orange line is US unemployment rate. So as you can see here, US unemployment here really, it going back and flirting with its lowest level it's been since the late 1960s, having just got below the low point that we had in the late '90s. The problem that you're having is whenever unemployment has been around these low points, as you can see from where we are today to where we were in that late '90s phase, even in the kind of 2005 era, was that this kind of, let's call it purple line here, was much higher and towards where the unemployment rate was than where it is today. What this is representing is that kind of classic, uh, kind of Phillips curve theory, in that the tightening of a labor force should consequently in time lead to heightened headline inflation conditions as kind of wages go up and demand grows. And that has played true. You can see in each episode in the '80s, the '90s, and the noughties However, that is not happening right now, meaning that, you know, despite multi-decade low unemployment, it isn't translating into higher inflationary conditions. So does the Fed, which now put into play this inflation targeting as part of the mandate back several years ago, does that need to be altered and tweaked because it is not now applicable in these current circumstances? So yeah, that could be quite interesting, something to keep an eye out for. That'll be a 2-day meeting happening this week. The other thing I just wanted to mention was, was Italy. It kind of has been somewhat simmering in the background but definitely not at the forefront, but that could certainly change this week because the Rome-Brussels standoff will escalate after June 5th, so in about 2 days' time, if the Commission decides to start disciplinary steps against Italy for failing to rein in its debt. It could impose fines technically up to as high as €8.7 billion. Now what you've got here is the yellow line is the Italian 10-year bond yield spread over German bunds, which of course has been widening as Italian yields have been rising. So generally, you know, keeping it simple, the widening of a of a spread indicative then of more risk in regards to that domestic country against the benchmark German yield. And what you're seeing here is the Italian— this is the FTSE Italian Bank Index. So taking not the FTSE MIB main stock index in Italy, but isolating the bank stocks which are highly sensitive to political developments. And you can see here you're getting a basically a divergence on this chart where the risk premium of Italian default, if you like, is rising to some respect against a backdrop of weakening expectations over Italian banks. So probably expectations that this will materially worsen or the pattern continue, certainly if the Commission from Europe go ahead and look to follow the formal procedure now of looking to fine Italy for breaching these terms, something which of course is in the spotlight given Salvini's performance at the European parliamentary elections 2 weeks ago. Otherwise, a few other points just to mention before I then get on to review the calendar. Aussie, despite some of the, the negativity, if you like, about some question marks on the, the Chinese manufacturing activity number being propped up by front-loading ahead of tariff implementation, or about overall global growth concerns. The Aussie actually is flat but did move a little higher overnight. Australian property prices actually fell their least in a year as the slide eases. Now I know that sounds a bit peculiar, but the Australian property price values, you can see here, this is CoreLogic City Home Values, fall the least in a year as housing slump has eased. This has been one of the focal points of the Australian economy, which has seen house prices, you know, in terms of purchase and transactions, absolutely dry up as prices generally had spiked so high over the last 18 months or so. But maybe a little bit of a reprieve in that front, but probably not enough to detract from the fact that the RBA is very much— we're anticipating rate cuts to come in the near future, and they will be holding their meeting this week. Uh, the other thing I wanted to point out was for any single stock watchers— I know there's a few people in the States obviously that follow us on, on YouTube— um, there is the, the World Developers Conference happening all week, of which you generally get Apple coming out and giving some clues about the developments that they're going to be looking to do from a a technology and application platform point of view. So maybe worth bearing that in mind if you are looking at some of the tech stocks, particularly Apple, as we go through the week. Going back then, segmenting back round to the calendar, uh, what have you got this morning? Well, quite interesting. Following on from the Chinese data, you've got the various European and plus UK manufacturing PMI numbers This will be followed by the ISM Manufacturing PMI, will be the headline reading for this afternoon, which will be quite key. Trump, as I mentioned, mentioned, begins his state visit. So day 1, 2, 3 dominates the first half of the week for him. So again, in terms of any, um, Twitter timing, you need to recalibrate that obviously now that he's on BST, now he's on London shores. You need to be aware that his tweeting activity might likely start picking up a little bit earlier than would be normal when he's stateside. On Tuesday, you've got the RBA rate decision, as mentioned. You've also got the flash eurozone CPI, which will be very interesting. Wednesday, you get the services PMI, obviously particularly interest for the UK to see how we're getting on, just given the state of play with the political uncertainty. You've You've then got the precursors for non-farm payrolls, US ADP, that'll be the headline on Wednesday alongside the non-manufacturing PMIs, looking out for those job constituents. Thursday, ECB press conference. Now I know I haven't touched in too much detail upon that event. I will do way more detail on Thursday morning. I'm sure the guys will cover in full because I'll actually be away from the desk in the second half of the week. But with the ECB, this is all about the details in regards to the targeted long-term refinancing operation, the details of which will suggest on how dovish are they being, what are the terms in regards to those 4-year loans for the banking system in Europe. And then Friday, non-farm payrolls, of course delayed, um, this given the fact because the Memorial Day holiday, so it's been bumped back a week. So non-farm payrolls on Friday, and as you can see at the very last edition on this calendar, Theresa May official resignation happens on Friday. Now on that point, just before I hand you over to Sam, a few things that I wanted to say was that here's the latest. Obviously a very busy Sunday in regard to political commentary. So here's the headlines. Jeremy Hunt: No deal must be kept on the table. Andrea Leadsom: Not looking to renegotiate the withdrawal bill. I want to pursue a managed no deal. Sajid Javid: Ruled out a second referendum. We must prepare for a no deal. Hancock: A time limit on Irish backstop. He was talking about— and then Michael Gove actually causing quite a large reaction and very divisive, given he's probably the only one who's tried to go down the compromise route, which has either been received with great disdain by the Conservative members or has been warmly welcomed as being a lot more prudent in its approach. Because Gove has said to consider an additional extension until late 2020 in order to get Brexit delivered. Um, so that's the latest date on, on that side of things. Of course, not really having much of an impact at the moment, I'd say, in terms of the pound, but something to keep an eye on as we go through the week, I'm sure. All right, with that, let me transition my screens and I'll hand you over to Sam. He's going to look at the charts. In more detail, but I'll catch you in the chat room and I wish you a great week ahead. Thanks very much.

Hi guys, good morning, and I think we can all join together and say just how relieved we are that Tottenham haven't won the Champions League and how excited we are to see Piers dressed in the red, and red is the color of the charts. This morning. Equity's obviously gapping lower, uh, over the weekend. Quite a key level just a bit below here. I know we, we've talked about this a couple of times in the briefing, uh, before, especially last week, around 2720 to 2325. So basically around the S2 today, uh, of the, the key point, uh, of potential support. We'll have a quick look at this on that longer time frame. You've obviously got a big move that's come from the beginning of May, and obviously May, the worst month in, in however long. You got the, the Fibonacci, for those that are that way inclined, looking at that. You got the 0.382 fib just below the level that we had back on the, the 8th of March this year. Um, so you've got quite a, a few levels of interest. I know there's the trend line that goes through here as, as well, just having a look at where that would come in pretty much bang on the, the low of the 8th, uh, of March this year. So futures of a low level of support, 2717 to 2727, that's where I would be, uh, be potentially looking at for, uh, a decent bounce. And if that wasn't to happen, well, things could obviously get, uh, slightly more ugly, uh, below there, uh, 2684 and, uh, 78 key levels from going back to the beginning of the year. But decent push lower, I think you should expect some support around there, all things considered. With, you know, the correlated market being, being oil, uh, you can see actually this morning just coming back down to, to test the lows that we had back in the beginning of February, late January, 52.37-ish on the futures, really key level. If that was to go, and obviously the, the low that we had back on the 11th of Jan around $52, well, again, it could get quite ugly again, uh, you know, furthermore, I should say, uh, with, with S&P as well. So at that low, 2720, that could go as well, and we really do get a further push down. But key level support. Be interesting to see where we close today. The reaction so far has been pretty pretty strong from those lows, and that's still something I would keep an eye on. To the upside, I mean, where would it feel like it could get out of trouble? I think a close above 55.27. So still quite a bit of work to do before this really does start to turn around. And the way oil has moved really since coming down from those lows, each time there's been a bit of retracement, you can see obviously back up to the, the 9th of April high rejection, and same again, just couldn't get above this range. And before that, you know, no chance of the 60.23 coming through. So each time we get that follow-through, uh, no real chance of breaking what, you know, the support turns to resistance. So be keeping an eye on 55.27, 52.37 as well, uh, this week. Longer term on the, the pound, we have a look at the currencies now. It's still all about the the 126 handle to the downside. The trend line from the 2017 low had a bit of a false break along with, uh, the, the low of the year and also that low from December last year. But really key level, multiple reasons why we could have found support there. And we're now just about 50 ticks or so up from the 126, or 45 ticks up from the, the handle. But, uh, again, going into the, you know, this— the following days be quite key to see what happens around here. Closing above that level will be quite key as well, obviously, with the dollar comments from Clarida back in the last week. Could there be a bit of a relief here? I'm not so sure, obviously, with all the Brexit stuff going on, but certainly a really key level. And if that was to go, if that was to get a breakdown, you know, You'd be wanting to look at your longer-term charts here, and the low that we had certainly on the back end of— or the middle of March, I should say— 2017, 1.2543 would be a level to look at before even that low just above 1.24 on the 2017 low. So not looking too good for the pound at the moment. The euro, which has been trending lower for so long, is still contained with that I'll be keeping an eye on the, the low of the year because of course we had that reaction a couple of Thursdays ago, uh, just from the, the, well, the multi-year low, a break of that, and again things could start to get ugly. To the upside, where would I feel more comfortable if I was a euro bull? A break above this trend line and 112 might be an opportunity for a bit of a relief, but as long as it stays below that, I think you've got to favor this market coming lower. Also, we've still got this trend line on which held a few Fridays ago. Any further push higher this week towards 113, obviously that would be a decent, decent move. I'll be keeping an eye on that retest, that trend line, and also the highs that we had from the middle of May as well. I was talking about the Aussie dollar, and, uh, it's, it's relatively near a, a quite quite a key, key level. We had a bit of a breakout of that fortnightly range, and just above where we're trading at 69.70, the double bottom we had from the 6th of May and 9th of May, we had a breakthrough, uh, of that. So I'd be keeping an eye should we get any further push. And actually, just the— pretty much the low we're on now is a pretty good support level. It was the top end of the, the range that had contained price for, well, more than a couple of weeks really. Keeping a, you know, close eye on that and how it holds around this point will be key for this market going through the rest of the day. Just above the high of the day, you can see that 69.70, keeping an eye on that potentially for this week. To the downside, still the bottom end of this middle part of the, the range held quite well, 69.07, and of course that triple bottom holding firm. Speaking of triple bottoms, gold's one from, uh, well, a few weeks back. You can— well, you can— let's just put this on the longer time frame. You can see just how strongly that held. Uh, it looked like it was going to get ugly in this market if it had gone below that at 1273.5. Wasn't to be. And we're now obviously well above 1300, uh, keeping an eye just above where we're trading. We have some key resistance from the high that we had back on the the 10th of April, just below or just on 1320. I'll be keeping a close eye on that. And any retest, of course, of these levels that we have broken through going, uh, through last week— you can see any retest of these potential, uh, you know, support levels now that were resistance— I'll be keeping an eye on those as well. But gold, really good move on Friday, of course, with the dovish Fed and, and the risk in the market. It's been continuing to push higher, as has the yen. As is the yen. I mean, arguably you could say this is in a bit of a trend channel, and then any longer, meet more, meet more medium-term trade, you might want to wait for a break either way for getting a continuation or a reversal. Contained quite well for now. The high also, just putting this on, you can see was the low that we had on the 31st of Jan before that breakthrough, uh, and the top end of this trend channel may well also come in later this week with the 31st of Jan high. So a couple levels to keep an eye on there as well. But similar to gold, in any retracement, keeping on these previous highs as they can be a good gauge of sentiment, not just for these markets but of course risk assets in, in general. So keeping a close eye on any potential tech test of these highs that had broken through as well. 9 minutes into the cash open in Europe, we're coming up to 10. Let's have a look over at the DAX. You can bring this in now. You can see just coming under a bit of pressure, about mid-range for where it's been today. That gap has already had a good go at closing, and the resistance came in, keeping an eye on the another test of that and knocking on the door. If we were to get a breakthrough, and it might well be the, the S1 is your, your guide there, or any potential trend line that might form, well, I'll be keeping of course a close eye on US equities as well. Just on US equities, and we'll just use the NASDAQ as it's the same as the, the Dow and the, the S&P, obviously with that, that gap fill mentality, uh, just keeping a close eye on that potentially in the later part, latter part of the day, uh, either to fill it or probably more sensibly right now looking to go short on the, the fill of it. But any questions, as usual, please do let us know. We'll have the, uh, the strategy in your inboxes later. But, uh, yeah, I hope you all have a good trading day and a good week ahead.