What is driving the negative sentiment in markets

So good morning everyone, it's the 25th of October and I will be delivering the briefing today. It's been an incredible week to be trading. We are coming up to the end of October, November is fast approaching, and then we have December in which we all know we generally have a Santa rally as it's called. But looking at where stocks are trading right now, if we start off with the S&P 500, quite interestingly, some big red candles here for sure, and we've all been monitoring this, but just like to talk about where we found resistance— sorry, where we found support yesterday. Um, so if we were to look at the sell-off that we've seen most recently, from highs to lows, it's 9.999%. Now this is quite interesting because at 10%, this becomes correction territory. So the S&P 500 just coming down to test that 10% sell-off from its highs. And that level at the moment providing some sort of support. Now, this is following suit with what's been happening in the rest of the world. So the MSCI All World Index is now down 7%. This is tracking the index, the indexes all over the world. And there's divergence we're seeing most recently in US equity markets being up nearly 10% on the year while emerging markets, China, Europe being down on the year, you know, Shanghai Composite being down almost 20% at one point. So there's massive divergence we were seeing is now sort of narrowing. And with that in mind, if you have a look at the S&P 500, um, let me just clear this up so we can see. The S&P 500 had slipped into negative territory for the year. Okay, we are seeing a bit of a recovery at the moment, but coming in yesterday, this had slipped into negative territory. So volatility absolutely has returned into this market. It's great to see, and I truly believe this volatility is here to stay. So there's S&P at the moment, um, taking quite a bit of a hit. This is also seen on the Dow Jones as well. So if we were to do the same on the Dow Jones Industrial Average, so again, 9.09, so just under the 10% mark. Looking at it on a yearly candle, um, let's get rid of that. Let's go to the pivot. So you can see, was negative yesterday, just seeing a bit of recovery, ultimately flat. One big doji at the moment. Um, the only thing which seems to be over outperforming at the moment on a yearly basis is the NASDAQ. So the NASDAQ is still quite comfortably positive for the year, still up about 8%. So even though we are seeing the sell-off being led by the tech in most recent days, if you look in a slightly longer time frame, well, technology stocks still outperforming. And I guess on a macro front, this sort of makes sense. Technology, you know, this is not like 2000, the dot-com bubble, where people were just euphoric about the thought of technology. Technology really is changing the world every single day. The pace at which countries and companies are adopting technology is forever growing. Um, so I do think that technology outperforming at the moment does somewhat make sense. I think if this slipped into negative territory, then we're talking about disaster, because obviously technology stocks being quite cyclical in nature, their underperformance would definitely signal— on a year-to-year basis— would definitely signal some sort of worries for the investors. So why have we been seeing this sell-off in the S&P 500? Now I know many people have addressed this. Anthony Cheung has addressed this, Piers addressed this, Sam has addressed this, but I think we all have our own individual views on it. I know I did touch upon this, but I think this was the most unloved bull run, you know, it was commonly said was an unloved bull run. So I think people finally finding an opportunity to sell. This being initially driven— if we start the year back at the beginning of 2018, this was all started when we saw the average hourly earnings at 2.7% versus 2.5%, bringing up inflationary fears, which meant tightening of policy. People worried. But again, look at sort of how we traded up to that massive run higher and then a collapse. So this was a rates story. Then we saw a bit of a recovery. Then we saw the trade war scenario start to come in. Then we managed to recover these trade war scenario with strong European— strong earnings. The strong earnings really driving the equity market beyond the all-time highs to go print new all-time highs. But once again, we're in earnings seasons and we are seeing mixed bags. So not as positive as we were seeing soon after we, uh, Donald Trump announced his corporate tax cuts. So we got rates going up, we got the interest rates, um, weighing on equity markets. We also have the Italian risk. So this is Italy being at odds with Europe, and Europe basically rejecting their budget deficit of 2.4% which were proposed. And then we have the midterm elections coming up in just over 2 weeks, and this obviously means that You know, I don't really see the midterms going well either way. If we see a Democratic sweep, well, Donald Trump turns super aggressive. If we see a Republican sweep, well, then Donald Trump is unleashed. I don't really see much positivity coming into this market following these midterms. So I think another factor adding to this equity sell-off and this rut that we're seeing here. But I think today is going to be quite key to see if we can possibly stage a reversal. I have been discussing this. I think we have one more push left in the S&P 500 before we find tumble. But what could cause that push higher? Well, today we have Amazon, Alphabet, and Intel being some of your largest names, and many, many other US stocks reporting their earnings after hours. So these may be the catalysts which start to drive the equity markets higher and give us that final little bull run that I see before the equity markets start to sell off again, I'd say a few months down the line. So Today is going to be quite key. Just keep an eye on this price action at the moment. S&P seems like it's just taken out a range and is driving higher. Another observation I was just looking at was putting the S&P, the Euro, and the NASDAQ— S&P, NASDAQ, and Dow Jones on one chart. Sorry, the chart seems to have— ah, there we go. And you can see a huge degree of correlation here. They're all moving down together. So, um, sometimes during earnings seasons you see one of these three major equity markets start to outperform, underperform, etc. But you are seeing sort of a synchronized sell-off here. So I think this is really being driven at the moment through risk appetite as opposed to any individual sectors or individual stocks causing any outperformance, underperformance. This is definitely a risk move that we're seeing. Evidence of that is looking at sort of your risk assets. So if we were to look at T-notes Um, T-notes, okay, price is going down, yields been going up. That's quite surprising, yields were falling on the chart and I'll show you that in a moment. Um, but here we go, looking at— sorry, that's why this is not T-notes. Here we go, T-notes here. So this yield story been bubbling away, prices going down, yields going up. But yesterday and sort of over the past couple days, we have started to see a bit of a recovery here as people are plowing their money into their safe haven of bonds. So this has sort of, if anything, may slow down this equity market sell-off. If people keep buying bonds as sort of a safe haven asset to counteract the downfall in equities, that may lower yields, which then reduces the cost of borrowing. Something to keep an eye on. But this is also being seen in gold, which has re-emerged as a safe haven asset most recently. You know, I wouldn't say it's back to its glory days where a small event or any sort of political, geopolitical, or economic risk would cause gold to go flying, but I have enjoyed seeing equities come under pressure and gold rally as well. As you can see this late last night in the S&P, we saw a further leg of selling and gold really finishing on its high. At the moment, however, approaching the top of the range and feeling some pressure, but this sort of This could also be driven as gold is torn between being a safe haven and also being inversely correlated with the dollar. On one hand, when we do see the dollar strengthen, as we have been seeing in recent days, there is that argument for gold to go down. We've also just saw the S&P is recovering at the moment, just popping out of a range, which is also weighing on gold prices. So an interesting market, definitely to be observing. I wouldn't go to say that gold is now once again got that safe haven status that it once used to have, but it does seem to be re-emerging for sure. So keep an eye on the dollar. And while talking about the dollar, let's look at your major FX pairs. So starting off with EUR/USD. This has been great. You know, we've got sort of Brexit no-deal risk increasing day on day. We have the Italian crisis increasing day on day. We've got dollar strength emerging given the fact that people are using the dollar as a safe haven flow, which has made the FX market really pleasurable to trade. Most recent days. It sort of comes up, really stay— you just identify these ranges that the market has been trapped in. When it breaks, it comes in for that classic, and then it sells off. Formed another range here, all right? We break, classic, classic. And again, this, this— just mark up the ranges. We've got a clear definitive trend in the FX market, so mark up those ranges, see where the market's comfortable, wait for a break, have the patience to go in for the classic. And this FX market is paying dividend if you have the discipline to do that. Same again in the FX market. Perfect stepladder down. Maybe a bit choppy on some data releases, but we have a range, we break through, got some classics, range, breakthrough. Okay, not too nice there, but over here, bottom of the range here, come in for the classic. So FX market really does have a direction. We have a weaker euro, weaker pound, and a stronger dollar, which is making this market quite favorable to trade. Let's have a look at the dollar index just to cement this dollar strength that we're seeing, and we'll discuss as to why we're seeing this dollar strength. So having a look here at the dollar index, just make sure I'm on the right chart. We're coming up, 2018 highs sit here around the 97 mark. We're currently at 96.13, so definitely on the front foot here. We're seeing us again coming loosely to the top of this range. The next real resistance point is the 60. $1.67 mark. If that breaks, then away we go. We'll continue to see the sell-off in your FX market as well as your equity market. Why are we seeing this continued strength? And I think a lot of this is to do with sort of the resilience of people's expectation for this rate hike coming in December. Despite being down 10%, despite global growth being revised down by 0.2% by the IMF, well, look at what the expectations for the next rate hike are. In on the 19th of December, still at 69.1%. This is— the market is still very confident that the rate hike is going to be coming in December. Moving forward to the next live meeting on the 20th of March, um, it's still not— I wouldn't say the market's particularly nervous there either. Um, and this is, this is quite telling. I mean, imagine if things got so bad that people started to revise down the likelihood of a rate hike. Or that it got so bad that the Fed had to turn dovish. I think that would cause a little bit more panic than sort of the Fed staying on track and just basically saying that this may be short-term volatility and staying on track on the rate tightening, hiking cycle. So I think if we did see the Fed step away from the fourth hike or start to revise down quite aggressively their outlook for 2019, that would be a source of concern for me because the central bank is panicking, well then investors should absolutely panic. But right now I think the Fed's doing it right, um, despite the risks. They're sort of staying steady. They're not promising too much, you know, 1% increase in interest rates in a year isn't the end of the world. Um, so right now their calm tone is also supporting prices. Seems that this chart has suddenly gone down, so thank you CME Group. Um, okay, so that's now discussed the dollar. Let's have a look at the commodity space. Um, we've had a look at gold. Let's have a look at oil. So we had the DOE numbers yesterday, generally a mixed bag overall. Um, your headline crude inventories, however, has grown, was up now nearly 6 million. Um, so that oversupply, maybe increased inventory, still very much weighing on prices. Plus we have the general risk-off turn plus the dollar strength. So oil at the moment very much comfortable on its sort of downtrend here. Um, as you can see, once again, play the ranges, find the range. It's been beautiful market conditions to be trading in, really, really favorable. Got a range, breaks out, comes in for the classic. All right, we've got a range here. Let's see how we performed. Okay, not yet, but that— these levels up here do look pretty enticing. If we do see a short rally, probably then looking to go short this 6850 level, quite interesting. This R1 looking pretty good, managing your stop quite closely. Well, no, not really, it's about 40 ticks, but a definite place to put your stop if you scaled into your trade, taking it down to the bottom of the range. Otherwise, a more aggressive entry, a break of this S1 and these lows could provide some good opportunity to take it down to the S2, which is on 65 mark as well. Looking at it on a slightly longer time frame, this is what Piers has been discussing, this trend line coming into play. Um, now regardless of which trend line you were particularly looking at, whether it was this one here, which is just being played at the moment, or if it was the ones connecting these dots here. Both have really been taken out at the moment. So I say the $63.50 mark that we were looking at, um, is going to be quite key right now. We have some support in between, $65 being quite important as well. We got this low we were seeing early July, but there seems to be quite a lot of liquidity around these areas here. Now if we started to get through there, I really would be expecting a clean run to about $60, and then after that about $58. So some key levels being taken at the moment. I think we might see some profit taking around this trend at the moment as we're seeing, but a breach of that, if we see a continuation in the extra sell-off, if we see a continuation in the dollar strength, then absolutely I'd be expecting this oil market to take a bit of a tumble. And this would be sort of your, my medium, well, maybe by the end of next week outlook to see where oil is trading. Then the markets will settle down once again. And then as we go into November/December, we get silly season again. We have lower liquidity and we may see more flurry in the price action. Okay, so let's look to your FX markets. We looked at your equity markets, we've looked at your commodities markets. Now let's look at the day ahead. There is one thing I haven't really spoken about which I really should have, which is the ECB event coming for the euro. The reason I haven't been all over it, I don't really expect it to be that big of a deal. We know rates aren't changing. ECB has been the king of forward guidance, so we know that QE is ending in December. About 2, 3 months ago, we were expecting an interest rate hike in summer 2019, which sort of overshot Q2 and Q3. You know, we're still 11 months away from that. 11 months? No, not quite. 9 months away from that. The ECB has already basically indicated that it's not going to be Q3— Q2 is going to be Q3. So we've got so much guidance from the ECB at the moment, I'd be very surprised if they change it. So we're not expecting anything for your interest rate decision, so we're not going to see a change to the refinancing rate, deposit rate, or lending rate. Um, but the press conference which under— goes, goes underway at 1:30 is going to be quite interesting just to look at what Draghi's tone is. I think, you know, he's inherently a dove. I know some of the charts show that he's a centrist, but no, he's, he's a clear dove. So some dovish comments from him are to be expected, but I would be very surprised if he revises any of his real communication. That is, you know, QE ending in December, interest rate hike Q3 2019. I don't think that's going to change, so I don't really I don't want to spend too much more time on that. But looking at where euro is— OK, let's think about— let's talk about that one more moment. Is there really any risk of him being hawkish? Absolutely not. Right. If we look at some of the data coming out of Europe, one of the most important data sets statistically for Draghi's decisions or the ECB's decisions is the German manufacturing PMI. And if you look at German manufacturing PMI, it's a one-way street for the past 12 months. This is going back, yep, since 2018 when we had this really good European growth actually plummeting all the way down. Um, so no, there's no risk of Draghi being hawkish. Is there a chance of him being dovish? Yes, that's already in his nature. So are we really going to see a sell-off? Probably not. Is he going to commit to anything new? Unlikely. So again, this is just— this is just making me think that this ECB event is not going to be something to get concerned with. We do have a Turkish rate decision as well for anybody trading the lira. Um, me or Sam will be on the mic to cover that a bit closer to the event. So after that, we have durable goods coming out of the US and wholesale inventory. So we have some relatively important US data which may provide some opportunities. Having a look at the calendar over here, um, I'm sorry, at 9 o'clock we also have German IFO business climate, which is going to be quite important. So we have a consensus view of 103 So we are expecting this to sort of edge lower as well, just continuing its trend. So going forward, the ECB rate decision 12:45, going to be a non-event. Then we're looking for the 1:30 press conference. Then we have durable goods coming out at about the same time. Might get a bit choppy there. I'd probably— Draghi never really starts talking at 1:30. I'd probably keep an eye on this data first and then Draghi starts speaking at 1:30, 1:33, 4, 5, etc. By the time he sat down. So you'll have the option to trade this, but again, I think liquidity might be a bit thin given that Draghi is speaking simultaneously, so be careful. We also have wholesale inventories. We don't really care about job creation at the moment. Okay, and then we also have some speakers from the Fed. So we have Fed's Mester, who is obviously hawkish. She was talking on before Money Marketers of New York University. I think that's going to be important. Fed's Clarida, who's a centrist, is speaking on the outlook for the US economy and monetary policy. It's obviously incredibly relevant, but that will be at 5:15 today. So if any of you guys are sticking around, anybody trading that, that's going to be an interesting one to listen out for, especially because somebody's a centrist. We have a relatively hawkish Fed at the moment with rates going up. But then we also have market conditions which should potentially result in dovishness from the Fed. So having a listen to what the centrist has to say, very much on the topic of central banking. So that's going to be quite interesting. Okay, guys, so that, that's just about it for the brief. I'll be on the mic throughout the morning and then Sam will be here for sort of the afternoon. Thank you very much, guys. Have a great day. I think it's going to be a fabulous trading session. Just be patient, wait for market conditions to pick up. Um, and I'm going to follow on from Sam, uh, trade what you see, not what you think. Best of luck, guys. Thank you very much.