US Banks Say The Rout Is Bound To Worsen

Okay, very good morning, Thursday, 27th of February. Hope you are well. And usual routine, I'm going to talk about a little bit about the broader sentiment at the market open here in London and mainland Europe, and then Sam will take over and look at the charts from a more technical perspective. But before I really get stuck into some of these headlines let's just have a quick look at the charts and how things are shaping up this morning. And yesterday had another down day in the Dow, lost about 123 points, uh, overnight in the Asia Pacific session. That kind of carried on. Generally, uh, US index futures traded down in the, the overnight session, uh, and so even though we've had a bit of a bounce as Europe has come in, uh, the NASDAQ still down about 78, the S&P 26, and the, the Dow is back down about 235 at the moment. So So still a lot of apprehension almost in the market about the kind of factoring in. Are we at the moment a realistic pricing in of the new norm with the virus, with the outbreak beyond the shores of, or the boundaries of China, or is there more to come? And that's still very much the dominant driving catalyst for sentiment still. Interestingly, I was just having a look in the currency markets, obviously the euro benefiting from a couple of things. One, I'm sure Sam will talk through the kind of technical movement that it's seen, but I was just looking at the currencies overall and the dollar index is down about 2/10. I mean, cable, you know, euro-dollar upward movement is a lot more clear than cable, but cable's flat. Euro's outperforming a little bit, up 33. But, you know, one of the things with the Dixie I was thinking is that if you actually look at the dollar index, it was kind of getting right up to that 100 level. Remember, about 2 weeks period ago, just gone, we've had some really awesome US data. The dollar rallied really aggressively. We've got up to that kind of round that 100 spot, and we've just started to see it fade. And now actually, with what's happened with more concerns, not just in the US but in Europe and globally, about the potential spreading of the virus, market in the rates area have started to bring forward much more aggressively the idea of the Fed are going to have to cut rates. And markets are actually pricing in now 2 Fed rate cuts by the end of the year, and that's quite substantially different from where we were just around a week and a half ago when that US data, you remember, was really strong and it was priced more for kind of keeping in line with what the Fed's communication is, which is kind of a holding pattern for 2020. So A little bit of paring back from, you know, if you zoom out a little bit and look at the dollar's performance— excuse me— over the last few weeks, I think that underlines a lot of the currency movement here this morning. But obviously, as I said, Sam's going to look at the technicals as well that are in play. Otherwise, the US 10-year is up 4.5 ticks, gold's up about $8.50, and we're coming up to a relatively interesting range area which on the daily pivots and the futures in gold would be around the R1 to keep an eye on for any further upside if we start to see further, uh, almost contagion, if you like, in the market on these ongoing fears around the coronavirus. So let's get into the headlines. I do want to wrap in a little bit about the S&P with some of the commentary that some of the banks have been saying, so I will transition back and forth between a couple of charts. But to kick things off, let's look at this. US identifies the first coronavirus case without outbreak ties. Now, I thought this was particularly interesting when I was reading this on my way into work this morning. So basically, this is, this is a person being treated in California. US Centers for Disease Control, so the CDC, they've said the patient doesn't appear to have traveled to China or been exposed to another known case of coronavirus. This is what's being coined as a phrase as community spread. They're calling it where the virus begins circulating freely among people outside of quarantines or known contacts with other patients. And if you think about it, if the market— you know, there were 3 things we were looking at. If you remember that, that piece that I published on Sunday, we talked about in a briefing Monday morning, 3 points. There was the spread outside of China, there was the material impact on the numbers on the supply chain, and And then the third point was fear. And fear is such a key one of what we've seen really add the momentum or the fuel to the fire of the moves that we've had. And this type of headline, I think, could be perceived as quite worrying looking at it that way, because this is talking about a virus circulating freely among people outside of the quarantine areas that have not been to China. Or been exposed to any other known virus of coronavirus. So yeah, that's almost like the perfect storm in my mind, where then you could see some real pickup in these numbers if that does indeed turn out to be, uh, the case. So definitely I think this was quite interesting. And you know, again, this is just one individual, but that's not the point. We're in a different realm now where it's not about the one time, it's about us pricing in then the future compounding growth where it just becomes exponential, and, and all of a sudden then people are already fearing the worst, and then that gets played out in the markets in the daily price action. A few other things here just to show you that I thought were a bit more graphically pleasing on the eye to understand what it is that's going on. This is the number of new cases in the last week. So this starts to look a little bit more between cases in China in blue on the bar, and and cases outside of China. So as you can see, there's been a steady incline, almost like a perfect inverse correlation here between cases in China have been decreasing, cases outside of China have been picking up. But a lot of this is to do with the, the kind of time, as we know, with the incubation period, and with China having been the origin, the origin, if you like, geographically, that started, what, about 4 weeks ago now when it originally kicked off. And so that's kind of almost seen peak virus and is now tailing off, and hence the reason why reports are that they're returning back gradually towards some normality. Whereas in Europe, it's kind of, it's just starting in this essence. So, you know, the question mark is, well, where does this red bar start to top out, I guess, is the question. But you can see we've actually tipped the balance, and actually I I know this chart is really rough in terms of the quality, but hopefully I can explain it. And what you're looking at here is you're looking at the beginning of the cases being reported. So this was going back to January 21st down here on the left. Now the blue bars are China, the red bars are the daily cases of new confirmed cases. So this, this graphic is wildly misrepresented. Because actually in China you're looking at thousands here, whereas cases outside of China, you're looking at hundreds. So I think to map one over the other is a bit misleading. But the point is, again, it's the shape of which the red bars are increasing that's important. So instead of like-for-like comparison, look at the direction. And so this is what markets have been pricing, this, this, this ability. And talking to Alex about this this morning, you know, one thing I think is if you look at something like China, you're looking at, you know, a Communist Party rule where, you know, when the state want to get something done, well, they definitely go about their business in a very, let's say, they're very tight on their implementation of their rules in that sense. And so containing one country under one policy is probably, you would imagine, more easier than trying to do cross-border cooperation of different countries. When you start talking about an euro area, for example, where you've got multiple countries all looking to then operate independently but in cooperation with one another, you've got to think that there's going to be many more opportunities for, um, you know, issues to occur in that sense, in terms of slipping through the cracks and then the ability for the virus to spread. So So definitely I think that's why the markets have been trading like they are. And, you know, another thing that was interesting this morning was, well, what are the big banks thinking now about where do we go from here? You know, there's a lot of obviously buying the dip mentality that has yielded some fantastic returns over the last few years. And, you know, whenever we get a big pullback like this, there's always that temptation to think, wow, I just want to get in. And this could be a perfect opportunity to ride it all the way back up again. And let me just transition my screen here to the S&P 500, and I'm going to talk you through Citigroup and Goldman Sachs and what their analysts and strategists have been saying overnight in their latest research report. So this is the S&P 500 on a daily continuation chart, and I've marked it up so you can see the corona spread outside of China. This is that big move that we've had this week. Now there is a couple of nice long-term technical levels here. You've got that, uh, the trend line that's been in play multiple times. And actually, if you look where we are at the moment, although we've kind of had a brief momentary glimpse beneath that level, pretty much to touch bang on the 200 DMA, we have bounced back and we sat right back on that trend line again at the moment. So I think today and tomorrow's session still is pretty key here as to ascertain, do we have another quite substantial move to the downside? And so where we close here on these daily candles is probably going to be very important. Now, on the downside, the 200 DMA, and you can see this horizontal line which was the previous all-time high, we retested it again here, which was back in September of last year. It acted as a bit of a support point for then the eventual push-up. So here is also a key area. So the 200 DMA and that line in the S&P futures, 3023, around that mark. Now what are Citi saying? Well, Citi are going one step further. They're saying a lack of clarity on both the virus outbreak, which, yep, I absolutely agree, it's a super difficult thing to try and quantify. And I think anyone who starts putting out there a specific date of peak virus or how, what the end game numbers will be. I think it's a little bit pie in the sky trying to, trying to do that. So I agree with that point. The second point they make, which is quite interesting because I think it's valid, is they say Fed monetary policy. Now we had Fed's Clarida, who's the vice chair, speak just the other day, and you'll remember what Fed's Clarida was saying was it's too really early to make any judgments about the best course of action to make from a policy point of view. But the longer the Fed stay off, then the less then the market can think that they're going to step in in order to prop the market up. All the more reasoning then that you can maintain the short knowing that the Fed aren't going to come in as the kind of the plunge protection team almost in that sense. The Fed, from their point of view, are very apprehensive because they do not want to fire their bullets too soon. They want to keep the ammunition back. So it has more value then if this route becomes more deep in the stock market. So what Citi are saying is that if you're going to buy the dip, they're calling for 2730 to get in. Let me just remind you where we're trading. We're trading above 3000 right now. So there's what Citi are saying is you've got to have a correction. You've got to go to the 200 DMA. You've got to go another 10%. From the 200 DMA, which we bounced off here, uh, in the session so far today in the Asia Pacific market. So from top to bottom, that's 20% from the sell-off that we've had this week, and that is by definition then not a correction but a bear market that you'd be looking at. Now, why have they picked 2730? Well, again, there's some pretty clear technical points to the, the relevance of that level. That brings us right back into the 2019 March and also June, that double bottom support that we had. And so yeah, are we going to get down there? That, that's a bold call. You would need to see, in my mind, a, a much bigger acceleration in those cases across mainland Europe and specifically in America. I think that needs to take hold, and then you need to get a pretty— it would need to be quite a rapid move because at that point point, an acceleration to the downside of the tune of 20%. Well, the Fed have got to act at that point. Um, so yeah, that Goldman Sachs, what are they saying? They're the other bank that came out overnight. They said without more clarity on stabilization of global growth, it seems too early to add to risk tactically. Now what again I think is quite interesting here is if you were someone who's been buying the dip on prior occasions Imagine how you feel now about buying the dip, because you probably would have come in on Tuesday and thought, well, the Dow sold off 1,032 points, it's got to be a buy the dip, right? And then it drops another 900 and you got badly burnt. Now come Thursday morning, Citi and Goldman come out. Citi says, do you know what, we've got to go another 15% from current price. So how do you feel about buying the dip now? So if you think about then from a like a kind of sentiment point of view. If no one's willing to step in and buy the dip and there is no dip buyers, you've got a bit of a problem then, and that means that you could see another leg lower. Now, this is also ratified by the fact in the options market, similarly, it's showing signs that people are showing more nervousness and a lack of stepping in, predicting further volatility volatility may occur. Now we all know that the volatility, the VIX, has surged to levels seen, uh, not seen in more than a year. The VIX, for those who it's a new concept, tracks the implied volatility of the S&P 500 over the next month based on out-of-the-money option prices, and it peaked above 30 on Tuesday. Now the VIX curve is in so-called backwardation, with the March futures contract trading about 1.5 points above April's, which is a departure basically from the usual upward slope of the curve. So typically when the front month of the VIX curve inverts, the rest remains pretty flat, and that basically is a sign that we're going to go through an episode of volatility and a return to normality. This idea that we, we see this blast of negativity and then recovery. However, the April VIX futures closed as much as 1.3 points above May's during this pullback, and that's the biggest such backwardation between the second and third month contracts since the volatility blowout we had in Feb of 2018. And what this is basically saying, if all of that— if you're not familiar with all that terminology, is that people are expecting more volatility over a longer period So now you've got all of these banks. Does that start to persuade or change market sentiment about the longevity of this sell-off? Certainly the option structure would suggest that is the case. So now tracking these numbers, if we do see it all of a sudden, a bit of a pop in America, and the most frightening thing of course was earlier this morning, that first case about US authorities identifying that hasn't had any ties to an existing outbreak or exposure to China. If those numbers start going north and then we start seeing other areas like, for example, the City of London, and numbers there start ballooning, that's the trigger point then. And we could see another violent episode and, and another 1,000-point, 1,000-point— but these things would all have to happen rather than us just hitting it blindly wanting to get short at this point. So The other final thing I wanted to show you— Alex showed me a really interesting technical repetition that's been happening in the Dow. And check this out, it's quite impressive really. And if I put a fib retracement, I'm gonna, I'm gonna go back to here. So this is the dip that we had at the end and that violent sell-off in Q4 of 2018. Take it up to the high then that we saw when we had the best here, remember, in Q1 of 2019, best rally in 3 decades. And then look, if I put that fib on there, check out that area right there. Perfect bounce on that fib, on that 38.2 retracement. And then if we do another fib level, so if I, if I get my fib tool again, I go from this, from the Same point, was it, Alex? Same point, yeah. So same point again, go to the next area here, and you can see once again exactly the same, bounced pretty much to the tick on the same Fib retracement. And then look where we are as of right now, same point again, go up to the all-time high, right on the money of where we are Again, look, literally to the tick it's hit in the overnight Asia-Pacific session. So 1, 2, 3, that fib retracement has been right on the money on every single occasion on that point. So yeah, today then, all the more technically important it is because that's the Dow. Go back to the S&P and that 200 DMA is key as well. As well as the close on that long-term trend line. So yeah, some really interesting setups coming up for the sessions ahead. Certainly by the end of this week, it's going to be interesting, and, and I'm going to be shocked if people are going to feel appetite to leave anything on over the weekend. I guess the only one play where you could do that is gold, and much to Will DeLucy's delight, Goldman Sachs and and every other bank obviously readjusting their calls. Goldman's now going for $1,800, bumping their call up by another $200. And again, as we've said many times in our briefings this week, it's just the best, cleanest form of exposure on the risks on the table, particularly with a yield in the US down at record low levels. I just think all the more so it makes gold a more attractive short-term investment. It's not enjoying this week though. Yeah, Will's just saying it's not enjoying this week so far, and, you know, perhaps a byproduct of just how aggressively it rallied in the week before when it had that kind of meteoric rise through $1,600. A little bit, what I could say to Will to make him feel a little bit better, I think it's a healthy correction there in order for another push-up. Is kind of my kind of view with gold. I still remain bullish gold, and I think now we've got our heads above 1600, I think it remains there for the time being until this outbreak outside China of the virus starts to stabilize, at least. Um, final couple of things to, to, to cover, um, from China's point of view. China's central bank continues to ensure ample liquidity through targeted reserve requirement rate cuts. You would absolutely expect this to be the case. This is not new, this is just them committing to instoring stability to the system. Donald Trump looking to defuse coronavirus threat and boost markets. Why is the market falling? It's the Democrats, of course, it's nothing to do with the virus. But, you know, this is not going to move the market, this is just Trump, you know, this is kind of, again, a strategy to try and restore some sort of calmness to consumers and markets, and that the US are adequately equipped to counteract that quite surprise headline we were talking about yesterday from the CDC about it's not about when, it's not about if, but when the coronavirus eventually does start to— the numbers accumulate in the US. Finally, not going to talk about this much because it's much more down the pecking order of things. The virus definitely more dominant But today, the British government handing over their initial mandate in regards to then kick off negotiation with, with Europe. And the point being is they're on an absolute collision course at the moment over trade. Couldn't be further apart. But this is absolutely as we would expect at this point of the timeline, given the transition period of Brexit so far. All right. Sam's going to head over while he does. A quick look at the calendar for today. Now this morning, not too much going on. This little cluster of European data is not going to be market moving, although it looks quite interesting. It, uh, it never really is. So then that takes us into the US session. You do have the second estimate of Q4 US GDP, got durable goods from the States, core PCE prices, weekly jobless claims, pending sales or pending home sales. Quite a few things coming out. There is also quite a few speakers. You do have Christine Lagarde speaking at a finance event. Text will be released. That'll be at 9:45 London time this morning. You've also got, well, a whole cluster of ECB speakers, in fact. So make sure you have that calendar to hand. And then you've got a 7-year note auction coming out of the States later on with also some Italian supply this morning. So that's it from me. Any questions on the video when we publish this on YouTube? Particularly on the VIX and the kind of, um, what we're talking about with backwardation, for example. Absolutely can explain more about that. Just leave a comment if you'd like me to, no problem at all, or anything on the, the things that I've covered. Okay guys, hand you over to Sam. I'll speak to you later on. Thanks.

Hi guys, good morning. Hope, uh, we're all doing well. Last couple of Training sessions of the week, let's get it underway. I mean, half my job's been done there by Anne and Alex with the, uh, the fibs, which look great, I have to say, on the, uh, on the Dow there. Uh, gotta have them on for sure. It's, it's been such good reactions to those points. I mean, I guess you would argue at each of those levels we weren't, uh, in a situation anywhere near as bad as this this. And I think we all believed that the Fed were going to continue to be dovish and that the trade deals were going to get done. Do we believe that the virus has been priced in yet? I wouldn't be too sure. However, and if I just remove some of Ant's artwork here, let's leave that 200 moving average on there for the S&P because of course let's keep, you know, having a look how that reacts every time we come through. It's it's— other than getting really choppy towards the back end of '18, it's, it's a level you've got to have on as an area of support. I think that trend line that I just removed, that was from that infamous trend channel, is a good enough guide going into the back end of the week. You know, are we going to close above or below is very important, I would say. And if we do get a bit above there, we might get a, a nice rally to start the, the week perhaps. However, like I said, would you want to hold anything over the weekend I'd be very surprised if you did. Looking just below where we're trading, this is still on the daily chart, um, you can see that 200-day moving average is, is very close below where we're trading here. So keep a watch on that. If that's to go, well, the next key level that I would be looking at, it really comes down to around 30, 20. You've got a lot of highs here from the summer last year just before China devalued their currency, and we had obviously a big correction, big drop I should say, there in August, and then the September highs before we broke through, found the support there in November. So that point would be the target area if we were to drift lower. Let's put this on to 60-minute here, and you can see the low that we had from— let's get the pivot on yesterday— is this holding up as a, an area of resistance as such? However, you know, the, these markets aren't what they were um, 2, 3 weeks ago. So, you know, stops do need to be a bit bigger. Therefore, you know, the size doesn't have to be as big for the trades to be comparable. Uh, other key levels to be aware of— I quite like this point here, 31, uh, 17, as a level of resistance. I'm expecting a bit of a range-bound day, to be honest. I think if we can push higher, and I mean like towards the pivot, you know, these areas here, I would like to get short again. I don't necessarily think we get up 31.50s, but that should be a point of interest for sure. Keep a watch obviously on that low and just be aware that that moving average, the 200-day, is literally just below where we are trading. However, a break of that area, 30.19, could be the point to keep an eye on. Oil, let's have a quick look. It's, uh, you know, I was just— I was doing a trade review for the guys here yesterday. I did mention some them. I'm not going to talk about it again, but I'm going to, uh, where I had a short, uh, overnight yesterday, uh, placed. I don't really like trading overnight without monitoring it, but a short on the retest of what would have been 2 days ago's low. It didn't fill me because of the spread on the platform that I was using, and it came all the way down, which obviously I'm not bitter about. But let's get that weekly trend line on here for oil, uh, because we're near some very key levels and we have broken at the moment, or we're looking like we're going to break on that week as well. Let's get it from that low 2016, uh, that double bottom, infamous double bottom around— was it 26s? Yeah, uh, break of the low there, break of that trend line, uh, as that came in. We're now trading— if I draw this on, I'd say the next point of interest towards $47. So we're trading, what, $48 at the moment. How close is that now? You can see it's about a dollar below. So I'd be keeping a very close watch on that. If I put this onto the daily chart, uh, and let's make this a bit bigger, you've got some other support just where we have hit that low. So this is the importance of that longer time frame, you know. If you don't have the daily chart on, you can't see that the low that we just had was actually the second of January last year's high. Below there, really, I would favor $47 to get traded. And likewise with, with, um, with the S&P, and in terms of trend lines, let them be the guide. If you are looking to, you know, be the hero and catch a falling knife, why not just be late to the party and get in above these, these levels? I think 5050 yesterday was, was somewhere I marked up as a pretty key point for, for a guide, and we couldn't get above there. We drifted lower, and now we're stuck within these— this new range. So for me, the 3 areas of interest: 1, 2, 3. And obviously, if you want to make 50/50 up there, you can. Those would be the areas where I'll be potentially looking to trade. Take it more intraday, then fine. You've got really this— call it a zone around 48.30, 20, that kind of point. Those lows, break through, retest, that could be a nice little area to have marks up there as well. Europe, moving over to the currencies, we'll have a look at gold. Getting short squeeze, pushing on. Uh, you could identify, you know, these previous levels here as a place to have got into the trade, and to be honest, on paper it looks fantastic. But the dollar is weak here, and the euro, which has been on such a big push lower, uh, has recovered here. Um, I just think a lot of these shorts just getting squeezed here. I would identify all these other lows as potential areas to get in. But the way this euro is going, it seems like 1.0988 on the futures could be, uh, well, achieved today by the looks of that. So if we are going off that, you know, the— you've got that key level just marked up there around 1.0939 on the futures. Keep a watch should we come back down to that. But look at this, the euro is really having decent pushes, consolidating for a bit and then going again. Um, so yeah, I mean, that next level up here you'd say is a good enough place for people to take profit. We're a long way from the, the trend channels of this, uh, this move lower. And I'm still kicking myself really not getting on New Year's Eve, uh, for the short for the euro, which was, you know, the top of that trend channel as we came back down. So that's a fair whack away. But if we could perhaps get up towards 1.1021 It could be enough, could be interesting enough, I guess, for a more medium-term short to attack those lows of the year should the dollar start to strengthen again. As I mentioned, the pound previously was, was, was flat, but this euro strength that's just pushed on in the last, well, time we've been doing the briefing has helped the pound here go as well. And we're now above that high of the day. Keep a watch, really just 7 ticks or so above, you got that high of resistance resistance area, which you can see is fairly well respected. So 29.57 there for, for the pound. I think it's worth having marks up on the chart as well. Coming back down to that pivot, I mean, it's potentially worth a little trade, I would say. You can see here, um, previous high come back, good area of support. Risk-reward's not too bad on that. Quick look over at gold just to wrap it before we have a look at the DAX. You can see it's, it's It has been tricky. I mean, yesterday's low, um, held fantastically well, but it was coming down quick at that time. Uh, we're now pushing on, and I said this— yes, this time yesterday about that. I think it was 60— yeah, 1660.6, give or take a couple of cents. And for me, that's the only area where I'm looking to get long on a continuation above. Yes, if we break the high of the day, but you've got then yesterday's high, you've got R1, you've got a lot of resistance resistance around there. So for me, if 1660 goes and it's the right, you know, conditions in the market, for me I like it up towards, um, 1672. But for now it's choppy, isn't it? There's, you know, it's, it's unpredictable which, which way this market's going to go intraday. Just when you think it's going lower, it holds up. It's range-bound, should we say, over the last two and this morning's trading sessions, I So let's have a quick look over at that DAX. Okay, it's down in the last 15-30 minutes. This market, put this on the day, has been under some serious pressure. It really has. And I think, you know, I was watching because I played football last night and got back and, you know, I can never sleep after playing sport. And I was watching Trump's speech at 11:30 and the markets just weren't interested. They weren't interested and he was just rambling on, he was rambling on. I think he was taking great pride in being number 1 on the list of countries that can deal with it, you know, showing the piece of paper to everyone, not really saying how they're going to deal with it if there is even a problem. But the markets were sort of turned around, they were already under a bit of pressure after German Health Minister comments yesterday, they haven't recovered since that, but you know, looking at this DAX here, You've got these, you know, the importance of the daily chart is where I was going with all of this. And you just, you do get bounces from these levels. And while I don't necessarily think we've seen the low for now, if you're, you know, trading intraday, you're not going to want to hold things overnight, understandably. Take profits when they're there. Look at this support, it's just fantastic, really, really is. So therefore, you know, you're looking at a break of that, then where's the next level? Well, really opens up a bit. It really could open up a bit. And that's equities as a whole. If we do get down to these lows again and get the push through, um, well, there could be some, uh, some further moves, but not necessarily expecting that today. For, for the DAX, you can see the importance of that low from 2 days ago. It's acted again as the high today. Um, can we get back up to, to 12,880? Not too sure. I did have some shorts waiting there there yesterday. Didn't quite get filled, frustratingly. But for now, I'm expecting similar morning to yesterday, perhaps just drifting higher, but getting an opportunity then later on in the session for a decent short is the way I'd be looking to play this. As usual, any questions, please, uh, do let us know. A couple trading days left of the week. I still think it's going to be one filled with opportunities, but again, that doesn't mean you have being something, uh, all of the time. Hope you all have a good trading day, and I'll catch you all later on. Okay.