The Trading Week Ahead: 5th-9th August 2019

Very good morning to everyone. It is Monday the 5th of August. Hope you all had a fantastic weekend. Um, looking at the calendar here for the main kind of scheduled events from a fundamental perspective, what we've got to look out for. So I'm going to run you through that. But before we go into that, obviously there is one big story to talk about this morning that broke last night, and that is the latest coming out of Beijing asking state-owned companies to suspend imports of U.S. agricultural goods. They've also allowed the yuan to weaken past 7, the renminbi falling past 7 per dollar for the first time in 11 years. And that's created then one of the biggest down days of the year so far in Asian Pacific equity markets. And therefore, the futures markets here have been under pressure just following suit. So DAX, having moved lower overnight, has found some support around its respective S2 2, but down about 128. The NASDAQ's already down off 100, and the S&P down towards the 2900 handle at the moment. So obviously I'll let Sam go over the, the technicals in more detail, but a real clear reflection of risk-off trade this morning. So with equity index futures lower, T-notes and gold already quite sharply higher. I can't think of many times actually when I've come in in the morning and I've seen T-notes up nearly a point on the session. They're up about 25.5 at the minute. Very rare, but just given the gravity of the latest development here and the kind of escalation, if you like, on the Chinese side, it's almost like they've hit their stop now with Donald Trump and now it's really got serious. And gold obviously elevated on the back of this renewed risk. Gold futures top right, just finding a bit of resistance thus far at the R2. But up about $11.50, trading at $14.69 at the moment. So yeah, interesting times. So let's get straight into the headlines. What exactly has been happening? And you know, here it is: China hitting back at Trump. You'll remember last week Donald Trump tweeted the idea about proposed additional 10% tariffs on another $300 billion of Chinese goods imports from September 1st. This was after almost like a 24-hour turnaround of those US officials leaving Shanghai. It caught a lot of people by surprise last week, but how quickly the president acted in such an aggressive way and apparently against what he was being advised to do from the likes of Steven Mnuchin, the Treasury Secretary. And this is what's caused this now reaction from, from China. So A few charts to have a look at to really put this into context. And this is looking at the, the Chinese renminbi falling past a key 7-a-dollar threshold. You can see here we flirted with this level a couple of times. We got very close to it not that long ago. I'm trying to think when it was now, probably about a year ago or so. And certainly when we had that fears of a hard landing going through 2015-16, with China, that was also a level. And you can see that, you know, there's quite a clear understanding, or there has been in the markets, that China want to protect that 7 level. It's quite symbolic in a way, and certainly given the fact that we've not really— the Chinese currency hasn't been that weak. You've got to go all the way back to the right in the midst of the global financial crisis at the time. Now, reasoning for protecting it is predominantly down to this idea that once you kind of pull the plug on 7, you know, does 7 quickly become 7.5 and 8? And therefore then the weakening of the local currency has ramifications for any assets held in that or dominate— denominated in that currency. And therefore people quickly pull their capital and this leads to large-scale capital outflows, which further exacerbates that situation quite quickly to the detriment of the country. One of the things then to be aware of is that— and I know most of you are familiar with this, but for those who are not, I mean, this is one of the biggest gripes, of course, by Donald Trump— is because China operates what, an FX kind of trading band, which is basically 2% either side of a daily fixed rate that they have. So obviously, in Trump's mind, this is kind of manipulation in its purest But as you can see here, you've got basically where the, the onshore exchange rate tends to trade in comparison to the band. And as you would imagine, the price sits pretty much neatly in the middle all the way through. You can see Q4 of last year, the first half of this year, we had that little episode when we had the bit of downside in the market, concerns renewed about Trump then escalating the next section of tariffs here, but, you know, dramatic moves seen overnight, and that's pressured it right to the bottom of that trading ban floor, as you can see, and notably going through that, that 7 level. Now, one of the things that China have said, they've attributed basically the yuan move to protectionism and expectations on additional tariffs on Chinese goods. So helping to weaken their currency a little bit. And what they're saying is that they can maintain a steady currency, i.e., looking to verbally calm those fears about mass capital outflows. Now, in mid-2015, devaluations spurred capital outflows and did destabilize global markets to quite a significant degree, though tighter capital controls are believed to be this time round what makes quite a substantial difference. and that in order to help prevent a similar rerun of what we had about 4.5 years ago, essentially, as far as what a lot of the analysts are saying this morning. So point being is that China, they're suggesting, can manage this process of having a weaker currency. This obviously then starts to go against what Donald Trump has been doing because it shows that they're further looking to— you know, a lot of people talking about the weaponizing of the currency this morning. But the other major and significant headline that came this morning was this one: Beijing asked its state-owned firms to suspend US crop purchases. You know, so this again, we know this is the more surgical way of China really hitting Trump where it hurts, which is right at the core of his political base. And obviously incredibly important as we go into the run into the 2020 campaign, which is now underway. How have this— how have the Americans tried to counteract this? Well, I was looking at some interesting charts at the weekend. Vietnam and South Korea have seen massive jumps in exports directly coming from US imports as they try to look— the Americans— for some alternative way to try and buy a source of still sell a lot of these products that are produced in that region. But for China, you know, this really is a substantial increase in the way of which they have been relatively passive up to this point. This certainly brings about one very interesting question, and the main thing I'm looking out for today is when Donald Trump wakes up, what does he say? That's probably in today's intraday session going to be the singular most market-moving event of today. And going off the data, obviously there was those tragic, you know, mass shootings in America. So he is operating from North American hours. So I'd say you need to start watching your Twitter feed from 11:40, is what the data tells me. 11:42 to be precise. is when Trump tends to start tweeting and stuff that's more sensitive to financial markets. And particularly, I have no doubt in my mind Trump's first tweet is going to be about this latest development. Now, my opinion is I don't think he's going to buckle. I think if you're looking for Trump to come out later and say, "Hang about, I love China, and China, we're going to cut them a great deal," and you think he's going to manage the fallout, I think actually, I think he wants a little bit of a stock market rout. We've got up to record highs. I think if you bump the stock market down a little bit more, akin to the correction we had at the beginning of 2018, at the end of 2018, you know, let's really start heaping the pressure on Powell because that ultimately is the stronger force here. If he can really create this multiple sequence of rate cuts from the Fed, I think then he gets what he wants. So I don't think Trump's going to buckle, not particularly given the events as well that have happened at the weekend. I think politically he needs to show he's in control. I don't think he's going to— I don't think he's going to flip it that quick. So if that is the case, potentially as we go into the North American crossover, could there be a renewed second phase to this move? Certainly that could be the case. But quite to the contrary, if I'm wrong, then I'd be looking for a reversal of a lot of these moves— equity recovery, gold pulling back, as well as the 10-year. In that respect, a couple of bank comments. What have they said? Well, you have had JP Morgan— they've come out this morning, they now see China letting the yuan sink through 7 per dollar. Their new call is at 7.05. Analysts at Goldman Sachs have also issued a new yen forecast of 103 per dollar in the 3 months. Uh, that's from their previous forecast of 107. Dollar-yen this morning in the futures, uh, is trading at 105.65. So again, if you look at dollar-yen over the course of the last— well, really going from the 1st of August to where we are at the moment, we've moved from 109 to 105. That's a substantial move, but as I say next 3-month outlook, Goldman's looking for 103. What does that mean for rate expectations? Well, I did have a quick look this morning at the, the CME FedWatch, looking at the federal funds rate futures in the short end. And actually now, instead of pricing in 100% for a 25 cut in September, the 50s come back again. It's like, it's like a broken record. Here we are again, markets now pricing in similar setup to really on the percentage split of what we had from the last meeting. We're now looking at a 16.5% and growing probability here of a 50 basis point cut to 1.5% to 1.75%. So yeah, definitely worth keeping an eye on. Quickly elsewhere, some other news stories to be aware of from the weekend. Um, just generally speaking, people are talking about oil, and I guess oil at the moment is a trade-off between supply shocks from the Strait of Hormuz This comes after essentially another Iranian tanker seizure. However, this is being overshadowed by the magnitude of the development that's happened overnight. So if anything, WTI crude at the moment is down 60 cents. I think if anything, people are becoming rather accustomed to the situation with Iran. I actually read quite an interesting article in the New York Times at the weekend which had a really neat infographic And it was basically saying that everyone's still buying Iranian crude, and they're still pumping it, because they're just basically— they're just turning off the surveillance equipment, and the ships just go and deliver where they need to go and deliver, from Iran's perspective. And obviously, who's buying that? Well, the Chinese, the Indians, the usual kind of suspects in that respect, who are not so keen to adhere to the US sanctions or what the US are requesting. So yeah, at the moment, the broader trade rhetoric overshadowing any of these supply situations. And then over in the UK, I'm sure you've heard plenty of Boris ramping up his cash pledge for the NHS, you know, multiple billion pounds worth of boost. That with infrastructure, with putting more police on the street, you know, everyone's kind of reading between the lines. This is pretty much as clear as you're gonna get of him lining up then this general election. The only uncertainty here is the timing of when exactly is that gonna happen. The only deadline we know definitively is that it's still October 31st for the time being for the lapse of Article 50 and the threat of a no-deal situation. So yeah, that's what I'm gonna say on that point. Going back to then the week in focus, uh, so Monday is actually taking on a new realm of significance. Certainly the biggest thing here is going to be the response from Donald Trump. Again, can't stress how important that's going to be today. Secondly, um, just quickly talking overview for the UK, obviously the British pound is still at a fairly precarious technical level, very close to multi-decade lows, again close to that post- immediate EU referendum low. Two things really, or three things we're looking out for. You've got UK service PMI coming out later on this morning, half past 9, and obviously the service sector particularly important for the composition of economic growth in this country. That is expected to be kind of stagnating more than anything. So rather than the contraction very evident in manufacturing and construction services still just keeping its head above water. But then on Friday we get UK GDP, and obviously from a more rolling basis we're looking for basically flat growth in the UK. And I was thinking about this at the weekend and, and just the way that Boris has been going about his political business. I actually think if you get a weak service PMI and a weak GDP, I actually think that plays in Boris's hands. In a rather weird way, and it's kind of a bit of a Trumpism where I think the worse the economy is at the moment, the more he can pass accountability to the previous government under Theresa May, and the more reason there is to hold this general election. So I think that— I don't really think that that's a bad thing for him if the economy is buckling under the pressure of the growing likelihood of a no deal. I actually think that's are positive for his, his messaging from the communication point of view. So there are two key points. The political one, obviously looking out for other updates surrounding Boris, is the, is the third point. Otherwise, other things to be aware of, a couple of central bank decisions. You've got, you've got plenty actually. You've got the RBA and the RBNZ and the RBI all coming out this week. For the RBA, after they've cut rates a couple times now. We're actually looking for them to hold pat for the moment. So that'll be coming out tonight going into Tuesday morning. Uh, you've then got the Reserve Bank of New Zealand, um, they're looking to cut this time around. I think markets are pricing in another cut by about November of this year. So definitely interesting if you're trading those antipodean currencies. Obviously for the Aussie in particular, monitoring of this trade war is going to be particularly key from a fundamental perspective. And then from China themselves, you do actually get Chinese trade balance data on Thursday. And so again, particularly interested to see the— what is more likely or not— the decrease in the rate of exports and imports out of the country. And it's more about an assessment of the severity of that slowdown that's key. And also the inflationary aspects. PPI, we've seen decreasing. We've seen that basically a divergence between Chinese PPI falling and CPI rising given the swine flu at the moment. Impacting particularly, uh, pig farming, and consequently pork and food inflation has been quite high in China. So be interested to see how that's also faring at the moment. Obviously putting a bit of a squeeze on the consumer, but very evident about the manufacturing export slowdown from the decrease in PPI. So yeah, I mean, that's, that's pretty much it in a summary. German factory orders and German industrial production is also something I'm going to be watching particularly closely, just given the fact of the current situation that Germany is facing economically, which has been a contraction in those type of areas as well, and how critical they are for now understanding about the next move of the ECB. All right, if you want this update though, the full graphic is available on my, my Twitter feed. You can see my handle just pointing to it down here. So if you do need that, um, just feel free to jump on there and check that out. All right, going to hand you over to Sam. He can look at the charts and give you his technical feel for the, for the week ahead. Thanks very much, guys. Have a good week.

Hi guys, good morning. Hope we all had a, uh, a good weekend. I guess the best place to, to start here is going to be with stocks, which, uh, pushing lower, uh, really since, uh, last night, but of course continuing the, the move from last week. And there's some levels to be aware of. As usual, we'll put the, the strategy report out, uh, this morning, get that in before midday. And, and the trend line from the, the low that we had, uh, the back end of December last year, you can see that's coming in. And we also had that second test 3rd of June. And we were tweeting about this, talking about— seems that everyone, uh, had this trend line up. And obviously the first test we get of that, you get a decent enough bounce and good level of support. So it'd be key to see where we finish the day or, or week, wherever it may be, in concerns to this trend line here. Definitely one to, to have up, really, uh, looking, uh, pretty strong levels below that if that was to go. Where I'd expect to see pretty sharp move lower. You've got some, some support just below there from going back to 18th and 13th of June at 84, 2884 and 66. But from a level I like the, the look of here around 2854, give or take a couple of points either way, around about there seems like it could be a good enough target if that trend line was to go, uh, to the upside. If we just put this more intraday in terms of looking at points of interest above where we're trading, Friday's low, you can see we found support there before breaking through, came back, resistance along with the S1. That's something, something that I would keep an eye on today. Dropping it down to 15 minutes, you can see we haven't really had that proper retest of that level good enough area of support this morning before pushing through. So there, S1, something I would be keeping an eye on. And of course, even intraday, this trend line, uh, which will come in around 2900 as well today, uh, something I would have marked up with this. Obviously, as I mentioned, gold is pushing higher. And just putting this onto the weekly chart, you can see just how high it has come. And level was not seen for quite some time. If we just draw a horizontal line literally where we're trading now, around 1450, just a bit above— last time we traded this price was 2013, May time. Will we get 1500? I mean, just see what you guys think about that. Got quite a key level certainly on the futures where we just couldn't get above back in 2013, 1488. Around there. So that looks like a good enough resistance, really breaking out of this multi-year resistance point from 2016, '17, and '18, uh, around $1,361. So it does look like the only way is up. Um, this $1,457 obviously holding relatively well in the first few tests of that, but we're just trying to spread our, our wings here in, uh, in gold. And we are above that yearly high. Looking more intraday, I think you do have to favor the upside. So while there could be opportunities to get short or whatever, looking at interesting, you know, points of support. Uh, yesterday's— or I should say Friday's, uh, high and Thursday's high, you can see the breakthrough of that. And this sort of trend line here would be something I'd be keeping an eye on with trending higher. So I'd just be, you know, I did mention obviously looking for it to go along, but breaks of these kind of trends here would make you maybe not want to say Okay, R1 was my, my original plan, but depending how it would break this trend line may make you think otherwise. Uh, and also trend lines coming up from those lows coming to around that same point, so around about 1458, which of course is that longer term level anyway. I do quite like the look of, uh, as an area of support, uh, to, to get long again in this market, which is of course just been drifting higher at some well, to be fair, not even drifting higher, going higher at some pace over recent days. Oil, another market which has seen a decent enough move in recent time. However, we are starting just to get squeezed in from both directions here. Just going to make this chart a bit tighter, removing the pivots. You can see coming from those lows again, that low is the same one as the US equities from December last year. You see we're just finding support on that, uh, last week. And also from the upside as well, getting relatively squeezed in depending where you place that trend line. So for oil, certainly from a more medium-term opportunity, waiting for the break either way I think would, would be key. You can see last week we had a decent couple of decent opportunities on break of trend lines. And if we were to, to come back to this one, they broke at all this week. I'll be looking for, you know, another strong reaction around there. So that would come in around 56.50, which is also some low points that we had from last week. Looking more intraday, and just put this on a 15-minute, you can see we are just drifting to the downside from those highs. So again, we'll be looking to, to get these trend lines on. I know the, the volume not necessarily going to be there this morning, but perhaps later on as we get squeezed in from, from both ways. Bit of a, a zone to be aware of below where we're trading here. Would get this as a bit of a rectangle. You can see from Friday morning to afternoon, and that coming in around 54.70 to around 60 on the futures. That's a pretty key level support. If that was to, to go, wouldn't be too long, I would imagine, before you see the S1 and, and this longer term trend line as well. For the pound— so I typed in the wrong code there— for the pound, I'd still be waiting to see, can we get a break below, uh, this key level? Let's just make this a bit clearer so you can see. We are testing the level from, uh, 2017, beginning of March. If we were to really get a break below that— we couldn't last week— if we were to get a break below there, 120 is of obviously the main target that people will be looking at. I've said it a couple of times, if we were to get any retracement— doesn't look like we're going to— uh, the trendline break that we had coming in around 124 would be an obvious place to, to take profit for anyone that did get long, or anyone that wants to get short again around there. So that's somewhere I'll be looking at. But a break below these lows that we had last week, 120, would be the obvious, uh, target. The euro had a decent recovery, uh, to the back end of last week post the Fed. We haven't, uh, completely reversed the, the move from 7 o'clock that we had on Wednesday, but it's not too far away, and that would come in, uh, around the R2. We are just also— we also do have some interesting levels you can see here just above where we're trading on the high of the day. That'll be keeping an eye on the low of the 25th, which is the ECB. We broke through that trend on, uh, the FOMC, and that will be coming in futures anyway around 1.1172-ish. So that'd be somewhere I, I'd have marked up on the, on the chart. For those that do want to see a continuation of this longer-term trend to the downside, where could that come in? Uh, well, you got all those highs from yesterday, yesterday for Friday, which are really holding strong. We can't just get that, that confirmation below there. So if we were to get a serious close below, then maybe we could get that continuation. But at the moment, it does seem resilient to, to any push to the downside. I'd also have this trendline on. While not necessarily respected too well this morning, you can see it's still intact in the third test just coming in there. So if we were to get, you know, a proper break of that, then, then sure, with those highs from Friday, then I would start start to be looking to go short. But for now, price is getting squeezed in, and I'll be more comfortable waiting for higher up around the 1170 or a break of that trend. Quick look over the DAX again, just finding resistance back on S1. If that was to, to gather pace, worth getting a trend on from the previous low that we had this morning. Uh, the previous area of what was resistance just acting as report now, uh, for the DAX. Half hour into the open. As usual, any questions, please do let us know. We'll get the, the strategy report out, uh, before midday. So if no questions then or later, please do let us know. But I hope you'll have a great trading day and a good week ahead.