US & China Signal Progress On Trade Deal

Okay, very good morning to you. It's Tuesday, the 25th of August. Hope you're doing well. I'm going to talk about US-China, vaccine, storms, and the Dow changed, which happened last night. That's what's on the agenda for the session ahead. So going to get you up to speed with the major market fundamentals that are in focus. And have a quick glimpse to start with the US equity market. And as you can see this morning, Europe just taking on from the, the baton from the higher close on Wall Street, and Asia pushed things up again in the overnight session. The main reasoning behind this, a combination of optimism about treatments for the coronavirus and signs of progression on trade dialogue between the US and China. So nice move seen overnight in the S&P Bit of a breakout you can see here in some of the price activity that saw us just squeeze up into the close on Wall Street. That was the final half an hour of trade, that big solid green bar, restricted a little bit in the overnight session, then a break higher and a nice run actually. And Europe's come in and just stepped it up again and just pushing for a retest up at around the highs which are printed now at 34.46. Again, on the, the the longer picture here, these are uncharted territories in terms of the S&P and the NASDAQ is concerned. We know the Dow will be changed, but a little bit deficient on the tech side, still lagging somewhat, uh, the NASDAQ and the S&P overall. But yeah, after we've now broken through with more conviction that, that 3397.5, which was the pre-pandemic high that we had back in late February, mid-February of this year, it's just continued to soldier on to the upside. So Quite impressive stuff. And, you know, if you're looking at the, the S&P today, um, interesting when we have this type of breakout move. I mean, if you think about it, we've gone from a, a price point of around 3417, 3418, uh, squeeze up into the close as I said. And so we've added, you know, a decent amount over a fairly short period. And yes, there's been some fundamental catalysts, some The last one being these updates in the trade dialogue side to accompany some of the positive vaccine and fast-tracking news that we saw from Trump, uh, yesterday. But yeah, a little bit of profit-taking perhaps before then. Another squeeze higher wouldn't be unusual. That tends to be a pattern that we've seen. And so generally what I like to do on this, these types of mornings, is just look for areas of where if we did get a pullback, there might be a meaningful area of support where the market might respond, and then you know, like what we saw with the NASDAQ yesterday. We'll bring that up in a second, but an early selling out the gate at the opening bell and then a really solid recovery by the close of the session. So here then, I guess if I was looking at the S&P, I'd look at the R1 on the daily pivots. You've also got the pullback low in late Asia session and what was initially a support point after the initial push-up we saw earlier, um, during that overnight session. Any further pullback that's more aggressive then probably be looking at 34, 29.5, and then back down to 24.25, which would encapsulate those previous highs that were seen just prior to the open yesterday, and again provided a bit of a footing after initial surge that was seen into the closing bell on Wall Street. The thinking here being that any, any decline that might occur is not necessarily negative, it's just in case any of these more short-focused traders look to just book some profits on this latest push-up and then more buyers come in if we start to pull back lower again. Again, another good level is down here at 3410, and then obviously below there, 3400 encapsulates that previous more significant longer-term area of what now will be a strong area of support. NASDAQ-wise, yeah, really interesting day yesterday. Obviously quite seesaw in that fashion of, you know, we initially popped up at the open and then quite a dramatic sell-off and recovered all the way, um, during the Asia Pacific session. And we're pretty much at a scratch now from that move yesterday, all in all. So yeah, higher from the overnight session. So just keeping an eye on that near-term range that's held first thing early this morning, then pivot probably the next bigger level on the downside, which would be around the Asia Pacific kind of session low at a similar price point. On the longer data chart, obviously it's looking fairly extreme here now. I mean, really big level further down, 11,283, which would be that previous rejection on all-time highs a couple times. And before found a nice footing on the 18th, and then, um, it, despite brief momentary break, held above that point on the 20th, and then it's just accelerated ever since. And, you know, one stock yesterday I did see was Apple. A lot of people obviously talking about, you know, this is a $2 trillion— well, now $2.1 trillion company in terms of its market valuation. You know, how far can it go? And I did see a research note that came out on Monday from Morgan Stanley, and it was talking about Apple. And on their bull case scenario— it's not their base case— their base case, they see a potential upside encompassing yesterday's around a percent or so gain, another 5% appreciation of the stock price. But in a bull case scenario, they see $681 over the next year. This would be underpinned by iPhone upgrades accelerating. Don't forget the iPhone 12 obviously on its way, and the, the refreshing of this model then tends to be a little bit more delayed. And generally now people recycling their contracts into the new phone, so when that comes due, generally is it has a meaningful impact. And then further services growth, which is obviously key to the company's long-term continuation of its, its trajectory. And they're basically saying then, on their bull case scenario, such stock gains would mark roughly a 37% move from where we climbed, or where we finished at the end of last week. And that would push then Apple's market cap to not near on $3 trillion. So yeah, an interesting stat. I did see someone— I can't remember the actual numbers Someone tweeted me when we talked about Apple last week and it was like the amount of years it took for us to go from 0 to 1 trillion and the amount of days it took to go from basically 1 to 2 trillion. So yeah, interesting to see whether or not the 3 trillion continues that trade, or trend I should say. So yeah, equity markets positive in, in overnight session. DAX then Quite positive as well this morning, up around 100 points, but finding a bit of resistance around the initial R1 in the futures. Elsewhere though, things relatively quiet, and we are continuing to track and monitor, and we'll look at the storm situation potentially impacting the Gulf of Mexico further beyond what it already is doing. So, and crude is pretty much flatlining at the moment. Elsewhere in the FX markets, the DXY slight negative It's down about 0.1%, so very marginal gain seen in the currency pairs. I say marginal, I'd say moderate is probably a better description. EURUSD up about 18 pips, finding a continuation of a bit of a bounce in the futures from around 1.1789, which was a nice solid level from yesterday and in the overnight Asia session. And then cable up a little bit further just following some of the dollar decline seen overnight with some of the general risk-on activity from emerging from the, the progress on trade negotiations between the US and China. Gold markets pretty much stuck within a, what I would kind of classify as a period of consolidation for the time being, within a rough $30 range of really 1930 to 1960 A lot of that sort of gold movement, FX movement, I would say now likely to be derived from markets in high anticipation and in waiting mode now for, for Jerome Powell. Obviously we are looking for him for, for more clear guidance on some of these key monetary policy review updates, particularly on that idea about average inflation targeting. And so it could well start to get a little bit quiet on that front in terms of the overall potential movement in those assets. But for the moment, the one that could be quite interesting would be equities, whether or not we see that kind of familiar pattern of a little bit of profit taking perhaps on the push-up that we've had, and then it just backs up, backs up to go long again in that perspective, because ultimately underlying that, things haven't changed fundamentally. So let's get stuck into some of the headlines. So first of all, starting with US-China. They spoke yesterday. So Mnuchin, Lighthizer, Treasury Secretary, Trade Secretary, talked with the Vice Premier of China, and both sides see progress and are committed to the success of the agreement. Now, timing is a fine thing. Obviously, just seeing through the veil, this is absolutely— was, was planned. You would say, by the administration and Donald Trump. Obviously, this call comes after what had been a period of escalation, the most recent kind of catalyst, if you like, being the change in the autonomy of Hong Kong through that change in National Security Law. Then you had the consulate, the unwinding of several diplomatic ties. You've had the technology situation with TikTok and WeChat, or 10 cent. And all of a sudden, out of nowhere, just coinciding of course with the first day of the Republican National Convention, they have a phone call and markets respond and we hit fresh all-time highs. So yeah, politics is certainly a fine thing. And it just reminds me so much of that trade war cycle which we often refer to, and the administration is the timing is just too suspect for this type of activity. And it says a lot, I think, for me about the real tangible risk that the trade war has on markets, which overall I think is, is small because ultimately Trump is in the White House for the time being and he is calling the shots with his team. And as much as there's going to be lots of assertive comments the way of China from Trump. I think underlying this in the end is the idea of, look, I, I, I do buy into this notion a little bit that perhaps, as strange as it sounds, does the market or does China actually prefer a second term with Trump than Biden? And underlying that potential angle being that It's better to just, just tackle US in isolation irrespective of this tit-for-tat, which you would imagine the aggressiveness between the two would dissipate when the election passes. If Trump wins, he's kind of secured then this next period of years ahead, and so therefore he doesn't need to be so aggressive on that front. And then at the same point, there's a deal in place where China now would look to adhere certainly in the second half of this year and likely beyond to commit to large-scale purchasing of these various US goods and imports. And this would be counter then to Joe Biden, which if anything on the geopolitical front would look to kind of reestablish relationships with other global partners in the Western world like the UK and the eurozone. And if China then finds itself, you know, not just against the US but against multiple other big trading forces globally, is that more of a frightening prospect than just dealing with Trump in isolation? And so, yeah, it's just so interesting how this politically is playing out. You know, China obviously playing ball at this specific timing that has the biggest payoff for the Republicans at this point in time, where, where Trump can again look at the stock market, he can look at how he can speak out about China, but then China are buying his goods and and so on and so forth. So yeah, definitely this was a driving factor in the overnight session. The other thing of course was that of the vaccine side of things. Yesterday we were talking a lot about AstraZeneca and about the FDA approval and the fast-tracking that Trump was trying to push, push on with. Moderna Inc have said that it's near a deal to supply at least 80 million vaccine doses to the European Union. This of course then comes after Trump said treatment based on blood plasma donated by people who've recovered from COVID-19 will aim to be expanded. Um, elsewhere then, the other thing that is coming up this morning has been the ongoing situation in the Gulf of Mexico. We've got like a double header, if you like, of storm activity. First of all, Marco, which has actually weakened. The status of that now it's made landfall is a tropical depression, and so one notch down from a tropical storm in that respect, which is currently the status of Laura. Now Laura is actually further out, but looking at the timing of making landfall in the Gulf Coast, Laura is expected to reach northwestern Gulf Coast as a hurricane So it is forming and anticipated to intensify according to latest predictions from the NHC and make landfall late Wednesday, early Thursday. Now on the back of this then, um, as of yesterday, upstream operators had shut in just over 1.5 million barrels per day of oil. That equates to around 82.4% of offshore production, um, and also 56.9% of offshore production of natural gas as well. Uh, to give you an idea in terms of the, uh, refining capacity of the overall Gulf Coast, um, over 50% of all US refining capacity sits within that specific geographic region. Um, but the potential loss of supply in the Gulf of Mexico is seen at about 2% of overall US production, so it is relatively small on that particular figure. If I flip over though, this is perhaps a slightly more detailed chart. I did tweet it if you did want to look at it in a bit more detail. But what is quite useful to look at in order to quantify the actual impact that this could particularly have is, yes, for one, here you can see the projected paths of Tropical Storm Laura and Depression Marco. And when Laura comes in though, you can see it does uh, it is anticipated to hit a cluster of very key facilities. Refinery closures from companies like Mativa Enterprises and Valero, uh, Valero, excuse me, Energy could potentially shut in more than 1 million barrels a day capacity before the storm threat passes. So it's always quite nice to see and get familiar with the general infrastructure of the, um, the coastline in the Gulf of Mexico because then you can start to anticipate a little better than the trajectory of these particular paths of these weather systems and how disruptive perhaps that they might be. At the moment though, the oil market relatively calm about the proceedings as they're unfolding at the moment. As I mentioned, oil here is flat. It's found— it's just hugging really and found some support around pivot $42.50, and then also underpinned a little bit by just general renewed risk appetite if that US-China tone starts to become more conciliatory, well then that should be an under— underlying support as well for price going forward if all things remain equal on that front. So keep an eye on that situation, the weather patterns. I'll keep you informed as well. And then the other thing just quickly to mention was a bit of a change in composition of the Dow. This wasn't unexpected in regard to the whole reasoning behind this change. Has been prompted by the fact that Apple has of course announced their stock split, and therefore then that's going to impact the value of their share price and then alter then the composition of the actual Dow Jones Industrial Average. It's been the biggest reshuffle though as a consequence that we've seen in about 7 years. ExxonMobil, which I think is actually the oldest company within the Dow— well, not anymore— so Exxon Pfizer and Raytheon Technologies have been booted out of the Dow, making way for basically Salesforce, Amgen, and Honeywell International. So it's always interesting to see the change in what sectors generally get represented. Obviously coming in a company like Salesforce is quite a distinct change from the historical type of company that would be present within the Dow. But again, without tech, Dow has really suffered given the fact that it's the Dow that's really dragged this— tech that's really dragged this market higher. Companies like Amazon, you know, Alphabet, Facebook, and so on obviously do not appear within this index. And there are various different rules of why that happens given the value of the actual share price. But yeah, worth having a look. But Founded in 1999, Salesforce has been one of the best performing stocks of the bull market following the global financial crisis, you know, being up very sharply. And Amgen is one of the world's biggest biotech companies. Its market value is about $137 billion. So Amgen actually considerably larger than Pfizer, irrespective of how much of a familiar name Pfizer is, you know, it is somewhat dwarfed now by some of its competition. Position. Shares in aftermarket— Exxon then following this news were down about 2%, Raytheon down about 3%. On the flip side, Salesforce, Honeywell up about 3.5%, 4%, Amgen up a similar margin as well. All right, looking at the day ahead, what have we got? We've already had the German GDP come out, very minor revisions on, on this front for the second quarter, just, just to bring you up to speed there. The quarter-on-quarter -9.7% versus expected -10.1%. So as you can see, the Euro DAX not really moving too much on the back of that, if anything at all. Looking at the German IFO number coming out at 9 o'clock. So again, as a refresher, this is the companies questioned with a soft survey, if you like, sentiment-based, about what is their view on current economic conditions and their 6-month forward-looking outlook used to then obtain and get an idea of how optimistic or pessimistic companies are, whether that's improving or decreasing over time. So typically is quite an interesting figure to keep an eye on. The actual headline business climate is expected to improve to 92.1 from 90.5, as I guess generally, although we monitor the COVID situation we've had a degree of stabilization somewhat, and economies continue to recover to a certain degree. Otherwise, the rest of the morning is pretty quiet. So again, as usual, a fairly US-centric session, but defunct of any 1:30 major US data. We do have the US consumer confidence coming out at 3 PM. You've got the Fed discount rate minutes. So for anyone new to markets, don't be confused We've already had the FOMC minutes, of course, last week, the discount rate minutes. So what is the discount rate? Well, the discount rate is what the Fed charges commercial banks for very short-term loans. So basically short-term being 24 hours or less. Now, the only time really that they, a bank, a commercial bank, would tap the discount loan is in a real emergency. They would rather than deal in the interbank market with other banks where typically they can access lower rates with lower collateral. So going direct to the Fed comes at a price. And also from a market point of view, in terms of the optics around that type of request of liquidity, it would be seen as negative and fairly desperate that you have to actually pay almost like a penalty fee, if you like, going through a more expensive rather than traditional route to access short-term funding would be surefire signs that there's probably something wrong with your bank. This was very common during the financial crisis, in particular back in 2008-2009, lesser so to the current day. And I would not expect the FOMC discount rate minutes to be a market mover tonight. You've got the oil inventories of course coming out later, and these inventory numbers of course going forward now could be particularly interesting given the disruptions from Marco and Laura, these storms that have been impacting the Gulf. And then from a speaker's point of view, Fed's Daly, a non-voter, and we'll be speaking much later on in the evening, so towards the close on Wall Street. And then quite a bit of supply coming out, mainly out of the UK, the German Schatz auction, and then a 2-year note, $50 billion US auction as well. So kicking off the supply side, uh, coming out of the States. All right, that is it from me. I'm going to wish you a good day ahead. Any questions at all, feel free to leave a comment. I know actually we've had a number of interns finish with us last Friday and throughout the summer. And for you guys, of course, anything I can do to help, uh, to continue the learning process, and this goes out to everyone, just make use of the comment section I always try to reply throughout the day. Absolutely happy to help. Okay guys, good luck for the session ahead, and I'll see you same time tomorrow.