US-China Hold "Candid" Talks On Trade

OK, very good morning, Thursday, 27th of May. Hope you're doing well. And usual routine, I'm going to get you up to speed. We'll look at some of the charts from a technical perspective and try to lace in some of the latest news flow. Main things I'm going to talk about on the fundamental side of things are talks, telephone call between the US and Chinese officials overnight, and also some latest Fed commentary and a bit of an idea here around the tapering side of things. Which we can also explore. But looking at general market sentiment this morning, things are relatively flat. But let's walk through a couple of these charts. And the dollar index is pretty flat this morning, but you'll recognize if you did, as a European/UK trader, leave the market yesterday afternoon, then we did see a continuation of dollar strength generally through late, um, kind of in the evening UK time into the end of the US session, and that continued through into the US session, albeit it has abated a little bit here over the last few hours. But that explains then that dollar movement of the major pairs seeing some downward moves. Had some dovish commentary out of ECB member Panetta as well yesterday in regards to ECB's bond buying and their policy on the timeline for, for any alterations on that front. So let's look at sterling and the euro first on the charts. And one of the things I was watching yesterday, which was being nicely respected, was this trend line going back to, um, what, last Thursday. It's had a couple of tests. We did break down through there, a little bit rough around the edges here in some of the price activity seen at the US exit, but then acted as an area for us then to push back lower. We saw an eventual low just sub-141 in the futures, which was around the low we printed back on the 17th of the month. We have reversed course, and as we come back up here to these levels, I would be quite interested to just see how cable reacts. Trading at 141.17, up at 141.26, you've got the trend line with the horizontal highs that we had from the US evening and the commencement of the Asia-Pac session, which was respected. So be looking at that as an area of resistance, and it'd be interested to see whether or not we— given the recovery that we've seen during the Asia-Pac hours, if we were to see some further dollar strength, do we then start to see the market trend back to the downside from here and let's target the back to the lows that we've seen in recent hours. So again, that would all be contingent though. And the thing I'd be looking at is not so much UK, but dollar movements in that respect. There's a lot of pressure as well at the moment, given Dominic Cummings' hearing on Boris Johnson. A lot of the newspapers making a bit of a meal out of that in terms of the pressure on BoJo. I don't think it makes any difference, to be quite honest. As bad as Boris might have come out from what Cummings was saying, I think everyone knows what Cummings' agenda is. So euro-wise, again, pretty strong downward trend that was seen through yesterday's trading session. We have found a bit of a flaw here. So I just put the ellipse back on. We have found a bit of a flaw in the Asia-Pac session at around a point of technical support that was seen in the previous Asia-Pac hours. On the daily chart, one thing I am keeping an eye on is, you know, euro's had a really great time of it of late, given combination of diverging fundamentals in, in one sense, where the dollar has been on consistent weakening trend under the Fed rhetoric. About holding firm on the transitory view of inflation, whereas in Europe things have been picking up, some optimism coming back with the better rollout of the vaccination program now, uh, and so forth. And so here then, I'm just keeping an eye on the daily because the low in the euro is getting close proximity to that trend line going back from the commencement of the move higher in the pair that we saw from early April, and it's held through May on a couple of different tests. And just given this, this technical action here on the daily, we have traded above but failed to sustain the move, which was that February high. So that kind of marks your top end. And your bottom end of the range here, you've got those previous lows that were seen back on the 19th and the 21st, an area of resistance as well back on the 29th of April. So it's quite a good horizontal just level anyway, but then throwing the trend line as well be looking at this as quite a key level of, of support. And if that does hold and that helps the euro stay above board— and one thing we have been seeing of late is whenever we have these bouts of kind of short-term dollar strength, they generally have been faded. And so this could be areas here to pick this up for a move back to ride it up to these previous highs that we were seeing earlier in the week, if that were to be the case. All right, elsewhere, um, let's have a quick look at US equities. And I'm only going to look at the S&P here, and then we'll look at some of the stories that have come out. Um, just looking on the S&P 500, very choppy price action. You know, we, we, we pushed up higher. This was back on Tuesday, and we hit then this recovery high well and above the 4,200 again. We've then kind of had this pattern of sell-offs to then rallies, another sell-off, rally, another sell-off, so on. The pattern though, getting— what's interesting here is actually the net result is we are gradually moving higher in a very kind of, kind of wave pattern almost. And so what I would say here is that trying to trade these indices at the moment can be a little bit tricky. I don't think there has been too much in the way of a great deal of new macro developments. The market's still trying to, at the moment, just judge whether or not this market can go higher or not. So one of the things I was saying to the guys yesterday was try not to just overthink the fundamentals too much. I think when the market is going through these ebbs and flows, uh, and particularly as you know, the market tends to go down quicker than it goes up. It can seem like quite a bit of momentum. Perhaps you've missed something, you know, it feels like, oh, this could be it now, we could start to see a deeper move. And inevitably then we just find a technical area, we start to bounce again. So I think just be aware of that, adapt to those new conditions. I do think more broadly this is a phase of consolidation, if anything else. And if we actually look on the daily chart here, we're above that key level. Remember, this is the level we've been looking at all week. We're We're looking for the breakthrough, which we did have at the beginning of the week, confirmation on the close above. And look, we've held each day. One thing here is the highs are getting lower, so it definitely is worth watching this because if we did break through this level, we could run heavy down to quite a bit lower and probably down to around, uh, 4150 type area. But for the moment, as long as that's holding, then I think the market continues to respect this range. And one of the things I'm just looking at here is some short-term trend lines over the course of the last 2 sessions or so. As you can see here, just being respected on the downside during Asia-Pac hours. And if we come back up, not that interested really at pivot, could probably even take that level off, to be honest. But if we come back up, how does the market react if we come up to here, which was the previous highs that we had at the commencement of the Asia-Pac session? Because we did initially drift lower before bouncing late on and that trend line. So during the US afternoon, if it does come up, that would be a key area of resistance just to keep an eye on, uh, for the day. Um, on that front then, let's throw in the first bit of news, which is that of the US-China trade talks, uh, and what exactly is going on here. Well, US and China trade chiefs had a— what they're terming a candid first conversation as the two sides try to resolve their differences over trade. At the same time, tensions remain as the White House top official for Asia said that the US is entering a period of intense competition with China. Separately as well, you'll remember yesterday, politicizing the origins of COVID-19 would hamper further investigations and undermine global efforts to curb the pandemic. This was according to China's US embassy. And this of course came after Joe Biden has ordered a new intelligence report on the, on COVID-19 origins. Now a lot of this, um, you've got to see through the lines and see it as tactical maneuvers in order to have the strongest possible hand going into a top-level negotiation. So where did the, where did the virus come from? I think most people will be of the view that this origination was in China, but this is something which the Chinese will be very defensive about, will not be enjoying. There's lots of other proxy things that are going on still at the moment of a fairly tense nature in the East China Sea. Lots of— this is a very multi-leveled political negotiation. And so for me, it's positive that they're having a phone call, um, and that they are in conversation. But a couple of things: I wouldn't expect any, uh, great movement on the trade side anytime soon. I would not expect any rollback of tariffs, which is what the Chinese want, but I don't think Biden will yield to that. If anything, he'll just continue to keep that pressure point firm at this point in time. And so I think there's still quite a few things that this needs to play out at the moment. And to be quite honest, if you step back from this situation and given the fact that midterms are next year and we're yet to see really the full recovery take hold in the US, where there's still millions of people who are not in work who were in work prior to the pandemic, like 7, 8 million. And so for me, I think that the, the, the Chinese situation is one that the US will want to manage, not particularly resolve in an end result of a trade deal of sorts, because of the fact that I think he's going to have to focus more— Biden's administration— on the domestic issues confronted with joblessness at this point on the back of the pandemic and getting the economy back reopened in time then for a major domestic political event in the midterms. Which is in a year's time or so. So I think at the moment this is positive. They're talking, you know, it's not so aggressive as, say, the Trump era, but I wouldn't be looking out for anything to happen anytime soon. I think the markets see that the same way. And, you know, there's no reaction to these discussions overnight. I mean, if you were to see a reaction at this point, it would have to go against of what I'm saying. So basically it would need to be they walk out of the meetings or put the phone down. In this case, they say there's no point in talking, or the opposite, they start making noises about rolling back tariffs, which is not going to happen in my opinion. And the market might rally in that instance. So they would be the things and how I'd quantify market reaction to these talks. The other major talking point, of course, was this one. I'm pretty much sure I'm always saying this guy's name wrong, so I apologize to Randall Kwohl. But he has come out, and he is one of the, the more senior officials of the Fed because he's the vice chair. And he basically said it'll be important for the central bank to begin discussing in the coming months plans to reduce its massive bond purchases if the economy continues to power ahead coming out of the pandemic. Now this sounds a little bit more optimistic about this idea of tapering, comparative to the fairly resistant rhetoric we were hearing with what the Fed was saying just a few weeks ago. I think what's important here is to recognize that the Fed are very aware of how markets are trading, and yields have backed off and markets have stabilized. As we said before, it's almost like the markets now have yielded their hawkish kind of view on tapering and started to listen to the Fed And as such, the markets have reacted in kind. So the Fed now are just playing this, this communication guidance game to me, which is, well, don't get too far flipping the other way. We are going to taper at some point in the future. And so this for me is just management control of those forward comms, if you like. I think important points here is don't be or don't misinterpret what the Fed are saying here. So this chap is saying he seeks taper talk in the coming meetings. Coming meetings could put us many months down the line. For me, this is strategic because we have a June meeting coming up in a few weeks, and that will be important because we get the latest projections in the Summary of Economic Projections from the Fed, and we'll get updates on what they think about growth, unemployment, inflation, and the rates. Not only that, then you get followed the month after in August with the Jackson Hole Symposium. These are the first very small incremental steps towards just keeping the market honest with the idea that, look, tapering is coming at some point, tying it to the metric, which I think is sensible. You know, it's data over dates, to coin a phrase. And so therefore, as long as the data is good, well, they are going to have to adjust at some point. But at the moment, that data is not really constituting that, given the fact that, say, the jobs report we saw a few weeks ago was so bad, amongst other things as well. So yeah, not to over-interpret this, I wouldn't say, oh yeah, this is reason to buy the dollar and yields are going to spike and T-notes are going to fall and equities are going to sell off today. I think that would be an over-interpretation of what they're trying to communicate, would be my point of view. Um, let's have a quick move over to some of the commodity markets and a quick look at the charts. Gold, you know, gold's seen some nice, uh, technical response to some levels. I can see here into the US trading hours last night, so when Europe walked away, we did eventually start to see some downward pressure come in amid some of the persistent movement that we had in the dollar. Tracking gold at the moment, I think, is, um, very much relevant to, to keep an eye on dollar fluctuations at this point in time. They seem fairly well correlated in their moves in an inverse relationship. And here, as we've come down, this level was quite obviously quite symbolic. 1900, that was the area of support on the leg up that we saw before then, the push on that came in the Asia-Pac session this time yesterday. Once we broke through that, we hit the daily pivot, came back up to test that exact level back down towards that same area of the low, and then we've come back up and now used that as a kind of springboard for then European participants to just bid it back up again. So here again, 1903 spot 8, same level looking at yesterday, I still think remains technically important. But otherwise, above here, um, perhaps you could look up at some of that range high from what we had yesterday afternoon at 0.0766 if you are managing a long trade on exiting out of position with an overall target back up to the R1 and relative highs that we've had in this latest push higher this week. Otherwise, any reversal, then be looking back down to those late US session, Asia-Pac lows down at 1895 type area. On the commodity front, worth bearing in mind, I know some of you guys look at copper There is some copper news. BHP Billiton overnight confirmed the Chile-controlled Central workers will begin their strike today and noted it will take contingency measures. That's BHP. While other workers in the Spence and Escondida— that's a very important mine, it's the largest copper mine in the world— they said they will continue working though during the Remote Operation Guild strike. So I think just to be clear, although there are some copper strikes going on in the country at the moment, which obviously on a more broader level could have a distinct impact on supply of copper, which is integral to many different things on industrial basis. The Escondida mine is operating as per normal is the latest of what we've heard this morning. And that's the one to watch. If that situation were to change, then obviously that could be very bullish for price. Okay, final thing just to mention, just so you're aware of it. On the coronavirus front, we have had in the Asia-Pac session Australian authorities have ordered a 7-day lockdown of the state of Victoria in a bid to prevent a new cluster of 26 COVID-19 cases in Melbourne from any further outbreak. Markets haven't really reacted to this, and I think this is just precautionary measures, very proactive. And so that's good on that side of things. I don't think people would see that as a reason to sell the Aussie. Um, elsewhere, one thing is— one thing we were looking at yesterday was that big bid we had in the Kiwi off the back of those hawkish rate forecasts that were issued by the RBNZ in their rate meeting yesterday. And the market shot higher. Really nice short opportunity there on the longer term trend line. If Sam North was still with the Amplify team, or if he is watching this, this is a, this is a Sam North trade. Long-term distinct patterns in the market, you know, we've got going back to all the way back to March. This is here for that initial high, the retest in May. We came up there in quite an oversold move in some respects yesterday on various indicators. Aligning up with the top end of that kind of trend channel, and then we've just drifted lower. And, you know, having traded up yesterday in the overnight at 73.18, we did come down to 72.66, um, into the beginning of the Asia-Pac session. So that's still a key level to watch on the upside, um, as we go further forward for the Kiwi. All right, quick look at calendar and let's wrap things up. Before I do that, final look at crude oil just to wrap off the commodity space. Pretty range-bound at the moment, as you can see here. So once again, the Iranian sanction news flow continues to kind of roll on. I don't think there's a great deal of too much emphasis on that at the moment. I think the general understanding in markets is that these things are going to take time in order to get a compromise tantamount to an agreement. And so therefore, again, kind of like equities, we're just in a consolidation phase, and it's just about respecting that at the moment and not getting too aggressive in either way, not unless anything unexpected were to materialize. Same thing with T-notes as well, just in this bottom chart. Um, we've had that decent move this week, you know, if you look at it, this is T-notes moving from last Thursday up to where we are. We've done over a full point now as yields have continued to just slowly decline. And so we're in this consolidation phase now between 132.26 and 130.301 now on the upside. I'll be watching today. Okay, calendar-wise, what's on the agenda for today? Quickly flip over. It's a quite quiet day for the morning, uh, at least in terms of UK and Europe. Um, we've had some German data out already this morning, the GfK consumer sentiment reading -7. So it was actually slightly worse than expected, but it's not— I wouldn't see that as a market-moving number. So then focus and concentration really is at 1:30 for the US data. You've got US durable goods, US weekly jobless claims, and you've got the second reading of Q1 US GDP, which is expected at 6.5%. Jobless claims expected to show another improvement, so 425 from previous 444. And then you've got pending home sales coming out at 3 o'clock. Speaker-wise, no Fed speakers on the docket, but we do have a couple of ECB members. Probably the most notable being Schnabel speaks at a forum on the new economy. Text to be released at 2 PM London time. Bank of England member Flager gives a speech on what government bond yields can tell us about future growth and inflation. So could be of interest for any sterling traders. That'll be at midday. Fixed income, $62 billion in a 7-year note auction. And that's your wrap. So I'll leave you to it, let you guys get on, and I wish you a great day ahead. Thanks very much.