US hikes tariffs on China, what next?

Okay, good morning. It is Friday, 10th of May. Hope everyone is well. Obviously, as you can see by the side of me, one big story from overnight, and that's really going to dominate my kind of section of the briefing, if you like. Usual routine, I'll talk about the news specifically and then Sam will come on. He's already been on the desk marking up some charts that he wants to share with you guys as well. So yeah, this is the, the big kind of headline, but before we get into this and discuss, you know, ramifications, retaliation, and, and things that we need to look out for going forward, let's just start off with what the charts look like. So as to kind of reiterate, got the EURUSD futures, so looking at FX top left, cable and then gold futures top right. Got the DAX, German stock index on the left, NASDAQ, S&P, WTI crude futures and T-notes in the bottom right-hand corner. So actually looking at these charts, cross-asset, things are relatively calm, obviously coming in. And if you were looking at the, I guess, news in terms of Bloomberg TV, CNBC, so on and so forth, you would think, well, maybe the markets might have moved drastically again because you know, as much as Trump likes to bark, does he have bite? And certainly whether he was going to follow through on these, this tariff threat was— left a few question marks. But he has done, and they've kicked in overnight. So one thing that you're seeing though on the charts is a relatively benign response, but you do definitely have to, I think, take into consideration the pricing in of this type of information. Certainly this week has been a a bumpy one from a stock market point of view, from a, from a Chinese yuan point of view, in the local assets in China as well. And, you know, just quickly switching this chart over to a daily continuation, this is a chart we've had kind of marked up for a long time. This is telling that kind of story, if you like, of what has been a really quite wide-ranging price movement. And when you actually think about it, from where we've been from literally all-time high to a correction, uh, to back to all-time highs, and now to where we are at the moment. So, you know, if you look at the candlesticks, these are representative of one day's price action. So going back obviously to the beginning of the week being the 6th, we were trading up around this bar here. So, you know, looking on a session high on that day of north of 2930 to get to where we are at the moment. So markets have already— let's have a look at it on a percentage basis. You know, we've gone from that high of the week down to where we are at the moment. We've fallen about 2.5%. So a lot of it has been priced in to that extent. And as we're going to discuss, so far, although we're still awaiting confirmation, China has not, you know, retaliated aggressively. And if anything, according to Trump, he received a beautiful letter from Xi Jinping, not just a standard letter. And some thinking that that means then that there's going to be a kind of a more passive approach to this rather than aggressive retaliations. And so yeah, at the moment, you know, these green kind of zones, if you like, were ones we had marked up in our weekly strategy right at the beginning of the week. And for the moment, those— that first kind of cluster of technical relevance, that being the 50 DMA, with also, you can see here, that previous resistance point in March. It played out with significance as well towards the summer of the previous year. So that was always going to be the first kind of barrier on any aggressive sell-off in the equity market, and it's held for the moment despite, you know, the quite ferocious move lower that we did see at one point yesterday, the bounce back. The other areas, again, from a medium-term perspective, as I said, even from now, the only one thing I think it would take for us to get down here would be if China came out with something quite radical on the retaliation front. And I'm going to discuss a few different options they could potentially go down, but, you know, even though we could get down there, I think that would be a pretty good lower bound price point, uh, on an intraday for us to get down to this type of level. I just can't see that happening today, but definitely these are the critical still remaining technical points for any pullback to keep an eye on. But I'm sure Sam will, uh, will go into this in more detail. Otherwise, in the FX market, relatively quiet. Dollar pretty flat, and that's reflected in the major pairs. There's a lot of UK economic data coming out shortly, later on this morning at 9:30. Gold's pretty flat, Treasuries flat, and WTI crude pretty much just sitting on a 62 handle. So again, despite any kind of knock-on effect that you might think that, you know, deterioration in the dialogue on the trade front might have, again, it's largely been priced in. If you look on a daily continuation here, this encapsulating the kind of price movement for 2019, you know, we have been moving lower. And if anything, you know, I'm sure Sam's been looking at this with you guys. You kind of got that the price movement that's been getting squeezed a little, but largely consolidating around this previous area where we found some resistance and support back at early part of April. So yeah, with the oil move, I think maybe less pronounced to a certain degree than that of the S&P. I guess there's a lot more going on at play from a supplier risk point of view still to be contemplated on the fundamental side of things for WTI crude oil. All right, enough of the charts. Let's have a look at some of the news then, what's been going on. So US has hiked tariffs on the $200 billion in goods from China effective as of overnight. So China immediately said in a statement it is going to be forced to retaliate, although it has not specified how at this particular point in time. Um, the most likelihood here, and we will discuss some of them, increasing tariffs on existing US goods or decreasing previous pledges on agricultural purchases, particularly soybeans, is probably the most likely outcome. And I want to put that out there right now because any kind of scaremongering about China dumping its treasuries, it's not going to happen. So, and I'll discuss why. But negotiations are due to resume later today. Obviously, this is happening in Washington, so if you were looking for potential timing around the pivot point of where sentiment could change or retaliation could happen, um, its likelihood it might come in the afternoon, late afternoon, potentially even evening, just given the timings where these talks geographically are taking place. Um, given that though, China could well make a statement. They tend to, in a historical basis, if it comes out of Beijing, comment at between around 10 and 11 London time. So I would be mindful of that as well. So quite a lot of I guess, potential headline risk on the table, which for me, if you were looking at intraday market, would make me a little bit hesitant to really get involved without that clarity really emerging. And if that meant sitting on my hands for the majority of the morning until we get into the US afternoon and a little bit of clarity starts to emerge, personally I'd feel a lot more comfortable with that kind of more prudent approach than getting too aggressive on anything morning would be my point of view. Asian shares kind of reflecting what we've discussed, not seeing, you know, any type of grave sell-off or anything like that. A little bit of a dip in overnight US futures, but again, nothing particularly drastic, minor negative if anything. Trump, Trump didn't stop at just putting the tariffs in. Of course, we are dealing with the US president. He said he'd go ahead with preparations to impose 25% tariffs on on a further $325 billion in goods from China, raising the prospects of all China's goods exported to the US being subject to tariffs worth about $540 billion last year. Now, that sounds pretty frightening and threatening, but he has tabled these types of numbers before, hence the fairly sanguine reaction in the market. So again, retaliation is what's key. A couple things here then to be aware of: matching the US dollar for dollar on US tariffs would imply raising a 25% tariff on all US imports, including those that go into China's exports. So that could be a way of which China could retaliate. Chinese policymakers could devalue the yuan to offset the impact of US duties on the US— on the Chinese economy. However, They did do this back in 2015, but if you think about it, if you're going to forcefully devalue your currency, well then this can prompt capital outflows out of your country because the value of those holdings now has decreased. That definitely is likely to dissuade China from taking such an aggressive course of action. UBS, they've been out and commented this morning. They've said China doesn't like self-fulfilling outflows. Flows that could come as a result of depreciation, which tend to diminish domestic confidence. So again, I would agree with that. I think it's very unlikely that they're going to go down such a heavy-handed route at this point. Treasuries— this is a big one people always talk about, of course, because China owns— yeah, I've got the number written here— they own $1.1 trillion of US debt. You know, phenomenal amount of debt. They are of course the largest holder of US debt, so obviously the thing that comes up is, well, why don't you just dump all of your US Treasuries? Big, big problem with that, because in summary it's completely self-inflicting given you hold that debt and so its value decreases. So China doesn't really have as well any other good options for where to park its $3.1 trillion in foreign currency reserves, obviously the largest stockpile in the world. So it makes it a very unlikely path. In addition, if China dumped its treasuries, that would cause prices to plummet, driving yields higher and devaluing whatever US debt the country is holding. So as I said, in effect, it would be completely self-harming and a highly unlikely way to go. One thing China could do, and one thing China have been doing, is they could ease off the pedal of the the pace of which they buy Treasuries. And if Trump wants a quite aggressive fiscal agenda going into an election year, i.e., to further stimulate domestically the US economy, China could put a bit of a spanner in the works by saying, okay, US needs to raise more debt to achieve that Trump goal, we're going to ease off the pace of which we're buying these Treasuries. So that's one way they could use that mechanism, if you like. One of the most probably likely ways, although they could match tariffs, so this like-for-like, if you like, they could also target agriculture. And soybeans is the one of which the market is kind of very focused on. So again, this is kind of looking down this, this arsenal of how could China retaliate. And so one of the things here I want to talk about is soybeans, which have already already slapped a 25% duty on them, China have. Much of the crop is grown, of course, in Midwestern states. If you think about the kind of composition of the United States of America and its political leaning, that is pretty much the epicentre of the Trump kind of electoral base. The Trump administration— not sure if you actually knew about this— But obviously, if they're going to put— if China are going to put tariffs on soybeans, well, this is what the reaction effect is. I mean, look at the price of per dollar per bushel of soybeans. It's crashed. It's gone from $10.50 to $8, below $8 in fact. So if you are a, again, a Midwestern state producer of this particular product, of which is an industry creates about $12 billion worth of flow in the US every year, then you are feeling pain right now. And last year in 2018, the Trump administration actually passed a $12 billion rescue package to help farmers affected by this trade fight. Problem is though, Trump has so far said that no new assistance would be given this year. So if he escalates this and China comes back in kind China targeting soybeans again. Now remember, to keep talks as an olive branch running, a few months ago China promised the US that as a good faith gesture, they would continue to purchase soybeans, and in fact, they would front-load those purchases, which is obviously good for Trump because it means that the US economy gets a little added lift going into this electoral race for his second term. So yeah, a lot of play here and a lot of different ways how China could respond. So definitely this could have political— if you wanted to really, from a Chinese perspective, to hit right at the heart of where it hurts Trump, him thinking about the next 12 months ahead on the political race, then this would be a good way of going about it to hurt him quite badly. So these are the things which I'd be looking for— tariffs in kind and particular focus on soybeans and agricultural goods, uh, when you break that down the next level. So that's going to be, I would say, the biggest issue to look out for today. As we're going to see on the economic calendar, quite a busy day actually. We've already had German trade balance data come out. Exports were positive 1.5%. For March, expectations were for -0.3%. So again, a little bit of a, I guess, mild relief for Germany, which has been under pressure, of course, for a multitude of different reasons. And let's not even forget that Trump really hasn't had time to focus still yet on the European and particularly German side, and that's still to come. But yeah, You've got UK data, a whole cluster coming out, uh, from GDP through to manufacturing, industrial construction output. And then you've got US CPI, building permits, um, coming out later on as well in the session. So plenty to go. And I would say that it's going to be very much a session driven by North American trading hours because all of the subject matter really of substance for global asset and intraday sentiment is all coming during that trading session. So that's how I'd be kind of basing things. A few other headlines to be aware of. Um, the Aussie— Aussie has weakened a little bit overnight, but as much as dramatic as this headline might sound, the Australian Central Bank cuts forecasts again, signals rate hikes. And we did have the RBA, of course, keep rates on hold earlier this, um, this week. A lot of this has already been priced in, is the point, similar to the whole kind of issues we've been talking about with the latest trade tariff increase. But to give you some clarity, Australia's central bank sharply downgraded its growth and inflation forecasts. This is part of its— it's like a 75-page document on its monetary policy report and update. And basically it's the clearest hint now that most likely or not they're going to cut rates sooner or later. Remember that RBNZ, they did cut rates earlier this week. Um, obviously Australia having its own issues— poor growth, lack of inflation, housing crisis. Um, not to forget, of course, any souring of the trade situation and negative implications that has on the Chinese, uh, not just stock market but economy. Has direct implications for the prosperity of the Australian economy as well. So yeah, just to be aware of, a little bit soft, but a bit of support found in the, in the, in the pivot level in the futures in the Aussie overnight. The other thing finally I just wanted to mention, um, you know, we've, it's been almost not earnings season but IPO season, uh, and thank goodness if you're an IP— if you're a Uber shareholder that Lyft came first, because obviously you get to see how the market reacted and interpreted Lyft, and how you can learn from their mistakes, if you like, to better position yourself. So Uber, the highly anticipated— this is kind of one of the big ones of the year— they raised $8.1 billion in its initial public offering. That gives them a market value of about $75.5 billion. I remember though, what was it, 4 weeks ago, I got a call from CNBC. They wanted me to come on and talk about Uber and Pinterest. The actual slot got cancelled, but it meant I had to kind of swat up with my Uber Pinterest knowledge. And even 4 weeks ago, they were talking about an IPO equivalent valuation of this stock of being $100 billion, and it's actually come in at $75.5. That's in a 4-week space. Uh, if you were to go back a year ago, they were talking about a valuation of the size of $120 billion. So, you know, the incredible, um, change in sentiment towards this, but I think absolutely necessary if you were Uber to make this a successful launch, if you like. So the company sold 180 million shares, $45 each, and that came in right at the low end of the estimated range. I think it was $45 to $50, or $44 to $50. The company hoping obviously not to follow what happened with Lyft, which is very much guilty of pumping up and inflating the, the kind of IPO price. But their shares are still down about 25% from the initial IPO price that they, they printed. Uber, few ways they've tried to mitigate this is they've tried to prioritize and be very selective of the shareholders, particularly institutional investors, so not to have those who instantly want at the first opportunity to start selling out of their holdings, but those who want to hold as a long-term position according to those familiar with the matter. So again, trying to get rid of what we had seen with Lyft is huge short, short positioning immediately. Even though it was at the low end of the estimated range, it does mark one of the 10 largest US IPOs in history. I think it's the largest one since Alibaba that we had. One interesting thing, of course, those not familiar with with these kind of, I guess you could classify this as kind of tech-related IPOs, but Uber is deeply unprofitable. I didn't even quite realize the depth of the magnitude of the loss. It printed a loss of $3.04 billion last year on an operating basis on revenues of $11.3 billion. Their total operating loss over the past 3 years is more than $10 billion, and yet they've just been valued at $75.5 billion. But, you know, this is the way of which the world works nowadays with these types of companies, through Netflix, Pinterest, Zoom, Uber, you know, all these different ones. You're buying into the future, the plan that they have going forward, not into the exact underlying profitability profit of the company at the moment. So yeah, just thought I'd cover that off. Okay, that's it from me. Um, as I said, the calendar is pretty busy. So again, you've got UK data coming up, so do be mindful of that. Uh, I can see there's a trend line being tested, which Sam will probably comment on in a second. Um, so batch of UK data at 9:30. You've then got US CPI at 1:30, which again definitely important given the still inflation focus of the Fed. You've got building permits coming out of Canada, like the US, coming out this afternoon with the employment data. So the loonie always very reactive to that. But overriding all of this is the potential disruption that could come, or opposite, which could be— let's— we haven't even talked about it, which is a resolution where actually China come back, create some sort of olive branch of sorts, which means actually the US say, well, actually, even though we've— this has kicked in overnight, we're not going to do it, and we're going to put another temporary freeze in place. And then we rally, risk on at that point. But all of this likely to play out into the latter part of the afternoon would be my kind of base case scenario. All right, let me hand you over to Sam. I will see you in the chat room, and I'll wish you a great weekend ahead. Thanks very much.

Hi guys, hope everyone is doing well. Good week so far. We'll start by having a look at the currencies before coming on to those equity markets, which are just testing the higher levels of the European session so far. Trend lines from those highs looking to, to get tested. Just bringing the euro in, which had a Good day yesterday as we came into the early part of the afternoon. The dollar had weakened and the euro pushed. I know it looks like a pretty, pretty big move in, uh, in relation to what's going on, but that's pretty much it. The range for the euro had been so small and really it was only about a 50-tick pop higher, uh, on, on that break of a technical range that had been in. Up to, uh, to one of the highs, which was worth keeping an eye on even going into the back end of the week here. If we can get back up to that— today's R1, yesterday's high— but also the breakdown that we had on the, uh, the Wednesday before the FOMC. Looking now more intraday, you can see this trend line that we had broken yesterday as well, where price really did start to push on. So I'll be keeping an eye on this whole area here. You can see this trend line starting back on the 7th, and all things considered, we'll probably be looking to come in around about 112.36 area. Probably the longer it goes, that trend line would push lower down, but one to keep an eye on. Also to the downside, you've had a couple of tests of these, these lows, but going back from the 3rd— if I just move that out of the way from the camera you can see it, and then to yesterday's low. That would be worth keeping an eye on should we have any dollar strength into the back end of the session. And like Ant mentioned, it's a decent calendar today, and you can't ever— you've got to imagine there's going to be a few more trade-related comments that are going to come out. But for the euro, those would be the, the main points that I'd keep an eye on, up towards that R1, with that level is pretty key, and then back down to this potential trade trend line around 1.1236 area. Having a look at another dollar pair, so the pound yesterday in a bit of delayed fashion also did push higher into the afternoon. And you can see, uh, on this look here, it doesn't look anywhere near as big as the euro, but it's only about 10 ticks or so smaller really. But, uh, where we now— we can see this trend line that I had drawn on this morning just before Ant came on. So we're just testing that now along with what was the, the high of the day. So worth keeping an eye on this if we were to get a break and close above this. Probably looking more, you know, 5, 15-minute for that close, uh, a push towards the, the R1, which is a pretty key level from yesterday's high as well, would be somewhere to focus on as a, as a bit of a profit target. But for now holding quite well. To the downside, see the low of if I just zoom in here, was also the, the high, uh, before the breakthrough, the final breakthrough yesterday. So that's been a pretty key level. Futures 1.30, well, it came in at 21, but around 22, 23, uh, from yesterday. Similar trend line, uh, that we just saw on the, the euro using those lows. This one, however, does have the, the 3 tests going back to the 25th, uh, of April tested quite well yesterday along with the, the S1. So keeping an eye on this trend line, which at the moment we're coming around 130 kind of area, which offered good support yesterday as well. Price perhaps just starting to get squeezed in, uh, in a week where it has drifted lower. But have we found the floor? Well, you've got obviously the numbers out at 9:30 and then US-related releases in the afternoon as as well. So I'd be surprised if we stay within this range come the end of, end of the day. But one to, to have marked up, I think, with those trend lines on both the euro and the pound. Having a look at, uh, at gold here, I'll just bring this into picture. We know how important that 1290 is, we talked about yesterday. And if I just reiterate that one more time, you can see just the importance of this whole area going back. It was the lows from early— well, mid to late Jan. We failed to, to push back above there having broken through. So that's one to have marked up, especially going into the back end of the week. To the downside, where you can see that the current low of the day has been tested multiple times, really key level, 1284 on the futures. If we get a push below there, well, you want to be aware of this trend line that's acted so well going back to the 3rd. We'll come in around, you'd imagine, 1282 or so, and then a key level of support just below that at the S1. To the upside, as mentioned, you've got that 1290 area, but just before that, R1, yesterday's high, and inevitable support before the breakthrough that we saw on Wednesday as well. So a couple of, uh, levels to start to get interesting in what until maybe yesterday had been a, a slow-ish day. Uh, having a look now, uh, equity markets, and we'll go through the, the S&P to begin with here, which is just testing that trend line. If I put it on a 5-minute, you can see— I'll just have to just move it as it's changed. Got those free tests starting obviously overnight, 120 coming into then 2:55, and then just now 7:30 before that breakthrough. Of course, this doesn't mean it's out of the woods. Got some key resistance just a bit above here, uh, coming in around 12— uh, 12, 2876 or so. The Dow had already broken above its similar, uh, trend, but we do have, uh, just above where we're trading also in the Dow, a similar level where we did have support before that breakdown yesterday. Morning. So a couple key resistance points to be aware of. I think this chart here, yeah, you can see has the, the longer term look at, at things. And where we close the week will be important, uh, the 21st of March, not just for the S&P but the NASDAQ, which finally did get a test of it yesterday, uh, has currently held pretty well. False break. And if we were to finish even where we are now but closer to the high of the day, then it would be a fantastic hold, and you'd imagine that the bulls very much in control here. Also yesterday, I'm just gonna put the S&P back on. You had a really good test of, uh, the, the gap from the 29th, uh, of— it was the March— trying to remember my months there, uh, but we had a really good test of that before that push higher. And obviously now we're quite significantly higher. Just, uh, shows— goes to show how important that level was. And the, the failed test of that, uh, of the break of that, uh, allowed price to really push on. Talking of the 21st of March, you can see here in the NASDAQ, we did get a break of it yesterday, having struggled to do so earlier in the week. And but again, failed to really, you know, capitalize on that push lower, and we are now, now above. My personal opinion— and of course it's a case of trade what you see, not what you necessarily think, and that will always be, you know, something I trade by— is I think we perhaps have underestimated, uh, things so far for equity. So I don't necessarily think we're completely out of the woods, but it will be interesting to see what happens later today and into the back end end of the session, uh, as well for the close of the week. Have a quick, uh, look at oil. You can see on that longer term chart really getting squeezed in. And I remember talking on— what was it, Bank Holiday Monday? So Tuesday, just how kind of unsure I was on, on oil price about where it's, it's gonna go. It seems very confined. And, um, and yeah, I think this, this just confirms that again. You can see really getting stuck in, in this range. And for a better opportunity, uh, might be worth just waiting for it to break out of this before really looking to get stuck in. And that might help or, um, act as a disadvantage for equities, uh, as well as we, we come into the back end of the week, uh, for, for oil and equities with that correlation that's been so good really going back to September, October, uh, last year. As well. Final look over the, the calendar just to get us up to speed, ready. We're coming just quarter past 8 now, so time to, uh, yeah, have a look, get ready for the UK numbers, 9:30. Quite a lot of that coming out before price might just start to die down around lunchtime. And then you want to, you know, get ready for the, the US numbers, Canadian numbers at 1:30, uh, as well. And quite a few speakers to be aware of. And then with the trade talks the way they are, it promises to be a pretty good end to the week. Hope you all have a good trading day and a good weekend, and I look forward to speaking to you throughout.