US to CUT China tariffs... market sentiment lifts

Okay, morning guys, let's get this briefing started. Welcome, final session of the week of course, Friday 9— Friday mid-January, I can't even remember the date now, 18th. It's not a great start, is it? However, markets have had a pretty good start when you're thinking about risk appetite. I've got a chart looking at the daily picture of the S&P long term, looking back over well, 18 months or so here, taking in all of this volatility. Of course, nice annotated chart here looking all the way back to where the interesting action really kicked off back in Feb 2018. But, but what's important, I'm going to zoom in on the, on the right-hand side here. Let me just zoom in on this. We've been looking at this, these kind of key technicals on the S&P As we've seen this 2019 rebound, it's like marking up the key resistances. You know, how far can this bounce go? Is it a bounce that ultimately will run out of steam and will wind up back down at the lows? Or is it more than a bounce? Is it actually the 20— I mean, obviously a lot of speculation, including from myself, I hasten to add. That we might even have already had the low of the year. That was, well, at least that 26th of December low, of course, is— I guess it's not the low of 2019 technically, it was in 2018, but the low of 2019 is a little bit higher actually currently. But, you know, the question still remains, you know, is this rebound temporary or is it more sustainable? I mean, even are we going to get ourselves back up at the all-time highs that we saw back in October of last year? What's interesting about yesterday's session and indeed so far today, these two green candles on the right-hand side here. What's interesting is we have taken out some pretty important technicals on the upside here. Some key resistances have been breached into the close last night. Those, those technical levels have— we remain above them this morning. So technically pretty important. You got the 50% fib of this entire episode, that, that Q4 dump. We're now more than 50% retraced. We're up through the, the trend line that we've been— or the trend channel, I should say— that we've been looking at for, for a long time now. And, you know, the breakdown of this channel back mid-December really opened the, the door to that, that violent collapse. So technically really important. Check out the 50 DMA as well. That's also been taken out. So this red ellipse is kind of that hot zone of collection of important technical resistances that have been broken. So today's important. You know, I think when you're thinking— I mean, we did close above these levels yesterday. We want to see that confirmed today. You know, it'd be nice for the bulls, that is, to get a weekly candle close above, above these key technical resistances. So Before we talk about the B-word, um, let's talk about why we're rallying, because it's got absolutely nothing to do with Brexit whatsoever. Um, just give me one second here, actually. I'm just gonna take the mic off briefly. Just getting some key technical support from, from IT, the IT support desk, Sam North. This is why markets are rallying this morning and indeed last night. We got some good news on the US-China trade war risk, and so this is where there's rumorings. I mean, it hasn't been confirmed at all, but of course, like with any of these kind of stories, there's no smoke without fire. This is Mnuchin, the Treasury Secretary, and he's suggesting that the US is, is potentially looking at actually cutting or even removing some of these tariffs that they've already slapped onto Chinese goods coming into the US in order to accelerate the negotiations towards an agreeable deal. So, you know, what we were thinking, of course, was that we're in this period of time where Trump has agreed to delay more tariff hikes. Now, this is definitely a lot stronger. This is suggesting that not only delaying hikes in tariffs, this is actually now looking at potentially cutting tariffs. So is quite a potentially significant turning point. What, what Mnuchin's basically saying here is that if we actually cut tariffs, then that really sends a strong message to China to say, look, we're very interested in getting a deal done here. And then they'll be looking obviously from, for concessions on the Chinese side in return. So this has certainly helped to shift things to the upside. What also helps, I mean, obviously China-US trade war risk is right up there, one of the top kind of global risks. Another big, big top global risk is the Fed and are they going to carry on hiking rates in 2019. And to add further good news to the mix, you've got Fed's Evans here saying that it's a good time for the central bank to pause rate hikes. So obviously expectations have turned a lot more dovish on the Fed this year. Given the slowing down of economic momentum, given the risks that we now have. I'll talk about in a minute the government shutdown risk and so on. So we've turned a bit more dovish anyway. So this headline perhaps not— well, certainly not as significant as the headline on from Munchen. Okay, so look, we started off quite positively here, and as I said, these key technicals, don't underestimate those. That is a significant breach of a batch of some very important technical levels. What are you seeing in other markets? Well, let's check out things like crude oil. Crude oil had a pretty volatile session yesterday. I mean, if we looked on a 60-minute chart, we're really in consolidation mode. This is looking back over the last few sessions, and you can see we're consolidating. We broke above $50, and, and it is a consolidation sideways. But if I'm going to go back to the daily chart, because the, the key— this kind of gives you a better sense for what's happening. We hit that low, as did the S&P, around about Christmas time, and then it's been a strong bounce. It's been nowhere near as big a bounce as you're seeing on stocks, of course. 50% retracement for the S&P, we're nowhere near, nowhere near 50% when you're talking about crude. Let's draw that fib series on here. We're not even up at the 32— 38.2 yet. But the key here is we're back above 50, but 55 is the next kind of hurdle. And we're back into that range. We're back into that kind of zone that we were consolidating in second half of November, first half of December, the 50 to 55 range. And we're just kind of back into that range. And I would say there is scope for a little bit more upside to $55. Whether we've got the fundamentals in place to see a move above $55 is a different matter. Certainly on the supply side, yes, Russia— well, OPEC+ have cut production, but of course US production keeps ramping higher. I mean, you've got news. I saw— I caught a very briefly caught segment on Bloomberg yesterday where they're Some analyst was talking about the US hitting output of 13 million barrels a day by 2020, making them crude oil self-sufficient, i.e., they wouldn't need to import any crude oil and they'd be self-sufficient. So clearly on the supply side, the US is very much— if possible, the US will continue to ramp up production. And as long as price is above $50, I'd say, of course, that is possible, that is viable for the shale industry. So you can't just say crude oil should be 50% retraced because the S&P is. There's definitely other supply-side factors that are fantastically important when you're considering crude oil prices. But look, crude oil yesterday volatile, but in the end hung on to its current levels. Gold. Well, let's have a look at gold because as you're seeing upside on some of the risk assets like equities, gold's taken a turn to the downside this morning. And what's happened is we've broken through that low point that we had from yesterday and you got kind of a batch of lows here. But perhaps this double bottom, which was looking back at the low from the 10th and then the double bottom on the 15th of January, is really the key support as well as this trend line that we've got drawn here. A bit of a pennant, you might say, when you're looking at the trend line nicely lining up the tops of these peaks. So a January 2019 pennant, the downside of which is being strongly tested, if not broken, as I speak. And so perhaps looking for a move to test this key 10th of Jan, 15th of Jan low. So that's at 1286. All right, so You can see here with gold, certainly a slight positive vibe to the global session. The Chinese markets have had a good time of it overnight, particularly because the main story is on that trade war risk and some positives coming through. So that's the kind of feel. What we have seen, I mean, just on the back to kind of the negatives, I mean, if we The other kind of big thing in January, of course, so obviously trade war risk, obviously Brexit, but then we got US earnings season. We've got this government shutdown, right? We'll talk about the shutdown in a minute, but let's just touch on earnings season. We had a kind of, well, Netflix isn't a big stock. It's not a big company when you're comparing it to some of the US kind of massive multinationals, but it's an important stock because it's been part of that, that FAANG tech story. And so when you're getting these kind of almost like celebrity stocks announce their earnings, then even though they're a small company, they kind of punch above their weight, I would say, from their ability to kind of influence market sentiment. And well, it wasn't good news, so Netflix dumped 5+ percent off the back of their earnings. And really, it was mostly about the, the fact that the, the user growth, although it beat expectations, I guess some analysts that, that beat, so it beat Netflix's own expectations, I should say. Some analysts were hoping for more. They were hoping for a more rapid acceleration growth. They were hoping for stuff like Bird Box You, the, the Netflix smash hits. They were hoping that that would have driven more of an increase in user numbers. So user numbers were up 8.9 million for the quarter, but that wasn't enough to satisfy traders. I would hasten to add that not enough to satisfy traders even though that beat Netflix's expectations. But you got to understand that the share price has rallied 50% just in the— literally in the last few months. Netflix has had huge volatility over the last 6 months, and their earnings have normally triggered some pretty wild movement. If you go back to the summer of 2018, their stock was down 30% off the back of earnings. Then it rallied off their earnings in, in October. And, and here, I mean, even though you got a 5% move, it's actually basically nothing compared to the volatility that we have seen in, in more— in earnings reports from 2018. So anyway, that's, that's the kind of earnings story. But as I said, this isn't a massive company. So yeah, celebrity stock, and you know, everyone's got Netflix, right? So, um, you know, people take an interest in it, but to be honest, it has no real impact, I wouldn't say, or it shouldn't do anyway, any, any lasting impact on global market sentiment, that is for sure. Um, okay, let's, um, actually, no, I would say I was going to finally get around to talking about Brexit, but let's not do that. I want to talk about the government shutdown. Let's finish off with the important stuff globally. Brexit is important globally, but only if it really goes badly. In the meantime, it's really a UK plus maybe a European story, but These are a set of graphics I'm sure Ant would have shown you earlier in the week. So we still have this ongoing government shutdown. You know the story. Trump wants his wall. The Democrats don't want to give it to him. And we are still at an impasse. Now, the problem is, if you look down at the bottom left, this is looking and tracking and comparing the length of time this shutdown is currently taking compared to previous shutdowns. And you can see we're already at a record. This chart's slightly old. We're at 27 days now. So the government has been shut for 27 days, um, record ever. And the key here is that that currently still doesn't seem like there's any kind of resolution to this problem on the horizon. There's still a massive standoff. Um, Nancy Pelosi's saying, Donald, you can't go to Davos, um, because the government's shut. And Trump's saying to Pelosi, um, actually I can't remember where she was going to go, to Afghanistan was it? I can't remember now, something like that. And, um, Trump's saying, well, you can't go to Afghanistan then, um, or you certainly, if you do, you'll have to pay for the plane ticket yourself, kind of chat. And, and obviously if, if that's the, is that the level of, um, threats that they're kind of producing, then clearly there's no love lost still, and therefore we're nowhere near getting a resolution done. The problem, of course, in the meantime is the longer that this goes on, well, the more meaningful and long-lasting the negative impact will be to the US economy. And that's on a few different levels. And Anthony Cheung would have covered this, but, you know, firstly, you got 380,000 workers that are not getting paid at the moment. Depends who you listen to, but the researchers are saying that every week the government's shut, you get between a minus 0.1 to— or between minus 0.05 to minus 0.1% negative hit to GDP. All right, so we've been going for 4 weeks, so you could say at worst, possibly, that's minus 0.4% of GDP. Has just been removed. I would say that the longer the shutdown continues, I would say the more negative that weekly impact should become. And this is the longest ever. In previous shutdowns, yeah, we've had a temporary blip lower on GDP, and then it's just pinged back, and, you know, a few weeks later, it's— everyone's forgotten about it. But I'd say this time, you know, if we go into— I don't know, if you get to the end of January, let's say, and it's still shut, that's another couple of weeks, then I'd say this is gonna steadily become a bigger and bigger and bigger market impact. If we flick back to the chart, at the moment this trade war stuff has— is timely because it's just taken over as a positive, but it won't last. You know, as I said, will the S&P stay above the 50% fib? I would say largely that's down to the the government shutdown unless you do get— all right, unless you do get confirmation of a deal done between the US and China. Okay, fine, that would certainly keep us up here. But if the government— outside of that, if the government stays shut, I can't see the S&P staying above the 50% fib next week, let's say. All right, that's talking about the US. We've hit the trade war, we've hit the government shutdown, we touched on the Fed. Okay, we've got a positive sentiment in markets despite Netflix's bad earnings. Let's switch attention and let's talk about everyone's favorite topic, Brexit. Here's the update. Theresa May has been chatting with senior parliamentarians, minus a certain Mr. Corbyn, of course. And the idea was she was looking to hear other ideas and encourage more of a kind of cross-party, cross-the-aisle sort of view. And I guess initially this was interpreted— and I'll have a look at the— let's have a look at the value of the pound here. So as I'm talking, initially this has been interpreted as the idea that we may well, most likely going to get a more softer Brexit, right? I'm here to tell you that I'm not sure that's the case. This is my personal opinion. Look at cable. Now, for now, markets have moved in that manner. Yes, some volatility, but that rectangle shows that cable's punched up to the highest levels we've seen in a month. So certainly sterling, and look up through this trend line, and although we've pulled back today and we're testing it, This is markets saying, look, this government failed, the vote failed last week, says we're going to get a more softer Brexit. Here's something to think about. I'd say after these meetings that Theresa May had yesterday, you had a lot of these cross-party MPs coming out of these meetings. Some of them were quite happy, and some of them were pretty frustrated and exacerbated, suggesting that Theresa May's not listening to them at all. and basically coming out of these meetings and saying, look, yeah, on the face of it, she said she's willing to, to kind of hear our views, but she's not really willing to listen. I.e., it looks like she's still maintaining that her deal is the only deal. Now, she's delayed the vote, the second vote. This has been delayed to the 29th of January, right? So she's got 10 days to tweak her deal. And I think what's gonna happen is she's gonna try and get out to Brussels, she's gonna try and obtain some kind of legally binding scenario around the backstop. And I reckon she's gonna come back, and I think she's gonna try— 'cause look, here's the thing, right? The government failed last week to get the bill through Parliament. She's got two choices now. 118 Conservative MPs voted against her deal, right? She's got two choices. To get a parliamentary majority, she either needs to get cross-party support, she needs to get Labour MPs to vote for her deal to get a majority. In order to do that, she's gonna have to move more towards a softer Brexit, all right? Talking about things like a customs union, you know, removing the no deal entirely from the table, getting Labour on side, majority in Parliament, bang. 'Right, let's go, we'll leave on the 29th of March into the transition period.' That's one way. No one's really talking about the other way, because what about these 118 Tory MPs? A lot of those are Brexiteers. All right, some of them are also Remainers, but what about— well, I would say that Theresa May's strategy might have just changed. I think her original plan was to run down the clock, And I think her plan was that the, the cliff edge of no deal would be such a big risk, it would force Parliament to vote through her deal. That's failed. Parliament are scrambling to remove the ability of no deal. However, what about flipping it the other way? Because of this scramble to try and remove no deal, I think the hard Brexiteers are going to have to vote for her deal because the alternative— forget about no deal now, the alternative is on the soft side. She's got this, I think she's got leverage now with the Brexiteers and saying, look, you can see what's happening. If you don't vote for my deal, we might not even have a Brexit at all. And I think this might see her initially at least maintain her current line of trying to get her deal through Parliament, strong-arming the ERG and the Rees-Moggs of this world to vote for her deal because it's the best you're going to get. If you don't vote for it now, we're going to get a soft Brexit or no Brexit. Okay, so, um, don't think that necessarily this soft, softer Brexit, or, oh, we're going to have a referendum and we're not going to have a Brexit at all— I, I think that's— I think that— I think the pound has been too positive here in the initial response. And I think you're going to get sterling lower as we— maybe today, but if we track through, depends what happens over the weekend. But next week, if it does become clear that all Theresa May is going to try and do is get a legally binding sentence added to the backstop and try and get her deal through the Parliament on the 29th, then I would say the pound's going to come back down. And a harder Brexit will have to be priced back in. All right, I'm not saying a break of 1.25, no way, but not yet. But I think maybe the pound's reacted a bit too positively here. Let's see, because the pound's down on the low of the day, we're down on this technical support which is this downward trend line, so, and on, you know, right around the 1.30 handle. So I think this 1.30 handle is pretty key this morning to really shape direction for the rest of the session. Obviously we're going to get headline risk as developments occur through the day, clearly. Um, here's, um, here's something of amusement. Uh, let me just bring up a screenshot. Uh, uh, good old Mr. Anthony Cheung, who's probably listening. Um, I, I caught your tweet last night, hilarious. This is looking at some tweets from certain players in this Brexit saga. Now, this is a tweet from Liam Fox. This is the Trade Secretary, and he said— now, the date of this is July 2017— the free trade agreement that we will do with the European Union should be one of the easiest in human history. This was his comment. Headlines today: not only is there obviously the trade agreement with the EU— they haven't even started negotiating it, never mind it's going to be the easiest in history. The other thing to note, headlines in the FT this morning: UK fails to close global trade deals ahead of Brexit deadline. Again, another great quote from Mr. Liam Fox. Let me highlight it here. This is what he said in 2017: We're going to replicate— so this is talking about when Britain leaves the EU We will need to renegotiate the trade agreements with the 40 countries that the EU has an agreement with, because once we step out of the EU, we kind of step out of that agreement. We're going to need our own agreement with these 40 countries, right? And Liam Fox was saying, yeah, we're going to replicate the 40 EU free trade agreements that exist before we leave the European Union, so we've got no disruption on trade. And he said, "Believe me, we'll have up to 40 ready for 1 second after midnight, March 2019." Well, how many are ready? Big fat zero. And the current status is, if you listen to the leaks that are coming out of the Trade Department, the status is you're gonna have none ready by the 29th of March. So this is looking like it could backfire. Just to give this some context, of those 40 EU countries— I'm sorry, the 40 EU free trade deals— this only, this accounts for 11% of UK trade. 11% of UK trade goes to these 40 countries that the EU have a free trade agreement with. However, 4 of those countries make up 70% of that. So actually, to be honest, you don't really need free trade agreements with all 40 necessarily. If you just get those key 4, then at least, um, the damage could be limited. But he hasn't got those key 4. These 4, um, by the way, are Switzerland, Norway, uh, South Korea, and Turkey. Uh, believe it or not, they're the 4 countries that make up 70% of the trade where the UK is using a free trade agreement that had been negotiated by the EU. So keep your eye on this story. It got leaked. I guess it's just— obviously the Remainers love this story. It's like a bit of panic about the idea of hard, you know, no-deal Brexit. It's going to be chaos. So obviously this has been leaked and pushed by the Remainers camp for sure. Okay, that is— that's enough on Brexit. Obviously headline risk through the session, clearly, as always. Um, actually, I'll go back to my other screenshot. Let's just look at the calendar of events for the day ahead. And data-wise, UK data coming at 9:30. We've got retail sales figures. This is for the month of December, and we're expecting a decline of -0.8% compared to the month of November. Previous figures plus 1.4%, so we're expecting negative figures here. On the year-on-year front, we're expecting an increase of 3.6%. So that's really the only data of any interest this morning. Can have— this stuff can have a temporary effect on the pound, but emphasis on temporary. Obviously, any headline developments, clearly that will overshadow any data here. The This afternoon, uh, US data-wise, well, we got Canadian inflation stuff, but then it's industrial production, it's University of Michigan, uh, consumer sentiment. That's preliminary. I think that'll be quite interesting. This January, uh, Michigan sentiment data could be quite interesting because how much is this government shutdown actually beginning to spill over to having a more broader impact on consumer sentiment. Um, so I actually think this, this Michigan number at 3:00 is potentially really important. Um, so, and I would say certainly most interesting data of the day. I would say, uh, whether there's a risk of that not being announced because of the shutdown, I think this one's okay because it's the University of Michigan that's running this. So I, I don't think there's a risk of that being delayed. We got a couple of Fed speakers Williams, uh, and Harker. Um, and down the bottom here, earnings season continues. Uh, the energy giant Schlumberger is the pick of the bunch. Um, otherwise, I guess State Street on the more kind of trading, uh, financial sector side, as well as SunTrust as well. But, but really, um, no, no massive giants here. So a slight, you know, that earnings season taking a slight drop down the pecking order for today. Of course, it'll ratchet back up next week Next week will be one of the biggest weeks of all for earnings, so we'll obviously be tracking that. Right, that's it for now. Let you guys get on with it. We do have a positive sentiment when you're looking at things like the equity space. Gold's getting some downside as a result of that. For now, we have just lifted back, but a bit of resistance will come in at yesterday's low. But currently, mild positive sentiment due to US China trade war developments. Let's see if that can be continued. All right guys, enjoy the session and enjoy the weekend. Thanks.