What next for Boris Johnson and Brexit

Very good morning, it is Wednesday 24th of July. I'm going to give you an overview of general market sentiment for the open this morning. I'm going to run through some headlines, like to the side of me at the moment, the latest developments and timeline in regards to the rest of this week now from the newly appointed UK Prime Minister Boris Johnson. I'm going to have a look at some headlines in regard to China that generally had led to a slight risk-on vibe to proceedings overnight in the Asia-Pacific session. This is after basically there's going to be more face-to-face talks between the US and China. However, China then did come out to release a new report which we're going to look at, which was quite damning of the US. Um, then we're going to have a look at the— a quick look at ECB. I'm going to leave really a lot of the detail to the preview that I'll do tomorrow morning. Ahead of the actual event, because obviously the ECB interest rate announcement and press conference will be on Thursday. But then we've got some very important data coming out from the eurozone throughout this morning. And so if either Sam or I are on the mic, I will update the chat, either one of us, so that you can be kept informed. We've got the French Services Manufacturing PMI coming out shortly at quarter past the hour, followed by the German figures Now these are important because these are the flash readings for the month of July, and as we're going to have a look at in particular the likes of the contraction of which manufacturing in German has been in, or Germany has been in for the last couple of months, that would be of particular interest to the market. And things like the euro, the DAX, the Bund will be highly sensitive to those numbers as they come out. So quick look at the overall general sentiment, and it's is pretty flat overall, so relatively neutral. Currency markets are basically unchanged on the session, therefore gold pretty flat. European and US stock indices are generally reflecting the same as to a T-notes, which are currently unchanged, trading at 127.11.5 at the moment. One slight mover, WTI crude. So despite more downgrades we had on global growth outlook from the IMF Yesterday, at the moment, the inventory situation from the API data from last night just helping propel prices overnight, and we're remaining above pivot in the futures. So oil just trading a $57 handle, up about 33 cents for the moment. So the news I'm going to talk about is more, I guess, general updates than it is, as per reflection of these charts, anything that there's big major market-moving news to take on board so far this morning. But as I said, the European data coming out while I'm delivering this briefing is important, so I'll try and keep you updated as those numbers come out while I'm going through the news. First off then is Boris Johnson, obviously as expected yesterday, and it caused relatively benign movement in, in the British pound because this was very much expected. I think the percentage was about 66%, which was pretty much bang on what expectations were. So no surprises. And this now, in terms of the timeline, means that Theresa May delivers her final PMQs. That starts at the regular time, midday. Then she will set off to meet the Queen to hand in her resignation letter. And then Boris Johnson basically will have the keys to Number 10 from effectively 4 PM. Potentially he'll give a short speech at that point, probably outside Number 10. The other thing, and the main thing we're looking out for going forward, is who is he going to appoint for his cabinet. One of the ones that we've had so far in the press is Priti Patel, the anti-EU Conservative member. And so we're looking out for what is the composition as to how much do they, or are they, aligned with a more hard Brexit, increased risk of no deal type strategy team. Philip Hammond and several others have refused to serve under the new leader, so their resignations as well could well be forthcoming today. Is that going to move the pound? No, because these are very much remain characters within the Tory Party, and Hammond even said on the Andrew Marr Show at the weekend that he would resign if Boris becomes PM. So it would be— even though he carries a position of significance as the Chancellor, likelihood he'll get replaced. I haven't really read too much about it this morning, but I remember a few weeks ago, um, Sajid Javid was being tabled as the potential Chancellor. That was one of the candidates of which Boris was going against in this elimination round just a few weeks ago. Could well be that person. Um, From here then, we're looking at cabinet appointments today. How much does that give a hint as towards then the potential stance in the Brexit negotiations? And then Friday is when he will then look to formalize that and deliver a speech of where he can basically choose where he delivers that. But if you think about it, where he delivers the speech, and this has always been the kind of, um, the regular a symbolic move from a new incoming prime minister is where they deliver. That gives a very telling sign of what their future ambitions and agenda might be. So in this case, if Boris really wanted to cajole the sentiment behind a more aggressive Brexit hard stance, then could he go to quite a heavily leaning Leave area to really rally the troops and general public sentiment? Or could he go to Belfast and go to Northern Ireland and really address the main issue at play? Um, personally, I think probably he'll adopt the former rather than the latter. Um, and as we're going to discuss, it's the latter that I think is going to be the sticking point still for his premiership at this point. Now, moving on to that, there's a couple of different things to show you. Um, This was an interesting graphic by our friends at ING who've updated their Brexit scenario probability matrix. What you've got here are 5 different probabilities or scenarios. Parliament forces a general election, revamped deal, second referendum, no deal, or revoke Article 50. Most probable in their estimations is that Parliament stops no deal by passing no confidence motion, a general election takes place as early as December, something of which in the press Boris Johnson has said that's not going to happen at this point, despite a lot of the rumor mill indicating that he could well go down that path. If there was going to be a general election, well then, Article 50, in order for that to take place, the technicality around legislation of that on playing out means that we'd have to have an extension of about 3 months. That would obviously take us to the end of the year, end of 2019. The least probable at this point is revoke of Article 50. Parliament may prefer this over a no-deal exit, but like a second referendum, MPs could lack a legislative tool to force the new PM's hand. And as they've noted in that black box at the bottom, ING say they also would not rule out Mr. Johnson asking for a further extension simply to buy more time to break the deadlock. Kind of like, I guess, what Theresa May was doing in the initial deadlines. But obviously now that Boris has put out such a definitive stance about the October date, that's what's going to make it interesting. Is this a game of brinksmanship with the EU and who is going to blink first? The biggest issue, of course, is Northern Ireland, and it still remains the case This is one of the other graphics that ING, I thought, was quite a nice summary, and it looks at the various different solutions to the Northern Irish backstop. And you can see how difficult this is, and it runs through the different ones in a quite simple infographic form. Removal of the Irish backstop, well, that can appease maybe a parliament majority but would, would not be acceptable to the EU. They've made that quite explicitly clear. A time limit on the Irish backstop, um, again, acceptable to the EU? Probably not. Revert Northern Ireland-only backstop, uh, Brexiteers happy because all UK customs union removed, but the DUP worried about greater trade friction between Northern Ireland and Great Britain, so they would likely block that. And we're still working majority with DUP support for the current Conservative composition. And then you go down basically these other areas, and whatever case you go down, either Europe or Parliament are not going to be happy with the status quo at the moment. So although there's, you know, Boris's speech was indicative of there's nothing to be worried about and we should be optimistic, it's— this is really, you know, what he says about this and the details of which, again, as per a lot of the hustings and TV interviews, he's shown not to be a man of detail. It really does come down to that now, so that's going to be really important. Just jumping away from the, the Brexit talk, just had the French numbers come out. Sam, if you could post them please in the chat room. French flash manufacturing fell to 50 Forecast 51.6, so stagnation on the manufacturing front. We've just had a pop in the Bund. Euro under pressure here, you can see in the top left-hand corner, we've just broken the Asia-Pacific low. So again, French manufacturing quite a bit lower than expected and on the cusp of turning into contractionary territory. If I just quickly jump over here This was the service reading. Let's go to the manufacturing and bring that up. You can see we have been sub-50 before. That's just come out here now for July. We were equal then to April. We had two blips at the end of 2018, uh, and also in March when we got around a similar figure. The services number was a touch softer, 52.2 against 52.6. So weak numbers Quite an explosive move in the Bund on the back of that euro, a test on the low. Remember, you got the German numbers to follow in about 15 minutes' time. So again, this was the charts. Here's the manufacturing situation back at 50. We have been there on those previous two occasions here. While I'm on the topic of the PMIs, let's quickly look at Germany before we go back to the other headlines. German flash manufacturing PMI is expected at 45.2. The previous reading was 45, so looking for a fairly constant reading here. But you can see the quite dramatic slowdown we've had in manufacturing through the last 12 months. It seems to have petered out and hit the, the bottom of that trend in March. That was right around the main part of when Brexit original deadline was hitting. And I guess the question mark is, you know, do we— have we now— is there a persistent trend here of stability in the manufacturing sector and if anything, a mild recovery? Or the, the bottom end of the range for the German figure is 44, which has put us right back down to that low which we printed in March. Any downside number is likely going to fuel further euro depreciation. Will probably put more pressure on this idea that, uh, of more dovish signals to come for the inevitable rate cuts, whether happening now or in the future from the ECB in the coming months, most likely September. So keep an eye out for that. I'll keep you updated when they come out. The final Brexit-related chart I just wanted to show you is this. This is a nice reflection of the main key facets of the British economy at this point in time. So if you were thinking about the areas of which define the UK economy, of which MPC members are monitoring closely, this pretty much encapsulates those main key 6 areas. And we had a really interesting development yesterday as far as the, the Monetary Policy Committee are concerned, because Michael Saunders, who's the most hawkish member, came out with some quite dovish rhetoric talking about how the Bank of England doesn't need to stick to its predefined forecasts, and that actually, given the uncertainties emanating from Brexit, that actually we could move, move rates lower is what he was hinting towards. And that's quite an important shift for the overall composition of the board becoming ever more dovish, in line with some of the other global central banks. And what we've got here is basically hiring is is faltering slightly. Jobs growth has slowed over the recent months, and that before had remained relatively robust, leading to the, uh, quite radically low unemployment rates in the UK, which was leading to higher wage growth, which for the moment the Bank of England suggesting will then lead to higher inflation in the medium term. Hence the reason more appropriate to have rates where they are. However, with hiring slowing, does that then in the coming months start to mitigate this, this outright hawkish signal from wage growth? As that starts to pull back, as we start to get closer to the deadline, if Boris does take quite a firm stance in Brexit negotiations, that's likely to put off further investment into the country, and therefore as a net result, manufacturing continues to be relatively tame, also given the fact that a lot of companies had already built their pre-Brexit stockpile or their inventories ahead of what was the former deadline in March. So yeah, quite a nice overview of the current state of play. Moving on, the other broader topics of course are trade wars, and as I said, we did have a relatively positive finish to proceedings last night on Wall Street. Uh, just quickly, I know Sam will look at these charts in more detail, but I was just looking at this setup in the S&P. Um, you had that trendline formation from basically the 16th, the retest on the 19th, and then the, the triple test that you had. And that line's still holding, uh, from the recovery from the low on the 22nd. And I know one of the guys traded— yeah, really nice trade catching the top of that. Didn't get the, the fill on the, the following contracts to have greater size because we didn't actually quite touch that trend line, but still nonetheless playing that technically in a very sound trade. You can see how well that, that actual trend line has played out because after we broke through it, really nice follow-through, then targeting our 2 on the rise yesterday in the future space. But when we came back down at the close, after the closing bell, retest on that line before then a recovery and a retest of the initial high that was seen at around the Wall Street close into the Asia-Pacific session. So quite a, a technical-based in terms of its execution, and I'm sure Sam will have a few thoughts about how to play that going forward on a pullback here towards the trend line and pivot. I'm sure he'll be looking at quite closely as we go through the rest of the session. But a lot of that coming from the idea that US negotiators are to head to China next week on Monday, further face-to-face talks. So another positive development following what was phone calls that we had last week as they look to push things forward. However, overnight China has released a report basically accusing the US of undermining global stability as the Chinese country released its first defense white white paper since Xi Jinping initiated sweeping military overhaul in 2015. So it's the first strategy document released in Beijing in 4 years and quite critical of the US. So interesting to see how Trump will respond to this. And obviously this comes as the prelude to face-to-face talks which are going to happen at the beginning of next week. Okay, I was going to talk a little bit about the ECB but I'm going to hold off on that. I'm very mindful of the fact that these PMIs are more important in the near term for the intraday. So the final things I'm going to show you are, um, we do have also on the calendar the US manufacturing PMI coming out later, so do bear that in mind. You've also got new home sales and you've got the oil inventory numbers coming out this afternoon. In terms of the oil inventory numbers, as I said, WTI crude did see a rally from the traditional, uh, well, around the European exit. So post-6 PM, prices started to move higher. We then had quite a bit of volatility around the release of the APIs because we had a drawdown of 10.961 million, so fairly punchy. Cushing also drew off just shy of half a million. Gasoline though was the biggest build since January, so do bear that in mind when we have the DOE's later this afternoon at 3:30 London time. That was a build of 4.436 million. Distillates, a build of 1.42 million. And then from earnings, earnings reports today, there are some particularly interesting ones. So I will share more details in the chat later. But pre-market, Boeing, the largest component of the Dow Jones Industrial Average. You've also got AT&T, Caterpillar, and UPS are the other names that I'd keep an eye on if you are looking at index futures. Pre the cash equity open. Then after market, you've got another one of the big tech names, one of the FANG. Facebook are reporting, they will probably capture most of the attention. You've also got Tesla as well, always quite interested to see how they perform. All right, that's it from me then. Let me hand you over to Sam. As I said, you've got the German Manufacturing Service PMI. These are the flash readings, these are important. And so I will populate the chat room as Sam is talking over the charts so he can also update you live as the data comes out. Okay guys, have a good day.

Thanks, and yeah, I mean, as the S&P is up, we'll start on that. And, uh, like I was saying, that, that pennant top end of that trend line working superbly once we broke through. Those trade comments really igniting the, the S&P late in the session, and the retest was, I mean, pretty much bang on to the tick. So keeping an eye, as Anthony was saying, around that pivot. Looked pretty pivotal, pun intended, with the trend line from the top end of the pennant and the bottom, and the 3,000, the handle there as well. So keep, yeah, keep a close watch on that. To the upside, we've got key resistance around 0.8, and then if you want to make it a zone, up to 10 as well, where, uh, you know, just above that then you've got the, the R1. But pivot looks key. The highs of, uh, uh, the, the day in yesterday and then also back on the 19th, and you can argue some resistance on the 17th as well, uh, uh, are interesting, uh, to the upside. To the downside, if pivot was not to hold or you actually didn't want to get in around that point, you can see there is a key level below as well, just the the, the resistance before we did break through on those trade comments last night, uh, around 97. So as a zone of support, really, from the low of the day, 3,000 and a handle, the two trend lines from those pendants, the pivot, and then this area of resistance as well looks pretty key. Breaks of that, uh, and you could see a decent drift down to another key area, uh, where it also matches up with S1, 29.90. And the lows from yesterday, which were the third test of that, uh, that trend line, which really held, uh, very well. So good, good tests on those. Just having a quick look over at oil because we had a similar reaction in, in that once we— let's remove these lines here— once we, uh, broke through the top end of its trend line. Let's draw this on. You can see just how strong that reaction was. So you had a really nice third test in the morning, and then once we came through late in the session, you can see the decent breakthrough. Didn't quite— well, anyway, on the, the 15-minute time period, didn't quite get the, the test, uh, retest back of it, but certainly you did on, on the previous high of the day. But really strong push through there for for oil, obviously, with the APIs, uh, coming out last night. So DOE's today, that would be a focus to, to have, uh, you know, more on what, where this market could go, I guess, more fundamentally. But technically, should we get back down to the pivot, you can see there was the morning support, but below there, uh, you've got quite a key point from 56.54 on the futures. Just a good price action level from from yesterday but also previous days as well. Uh, be just wary just in case we were to have an opposing reaction to last night for those, uh, from those APIs back down towards the retest of this trend line and the bottom end of this trend that started back on the 18th. That'd be somewhere I'd have marked up as well and focus on going forward. Looking over to the currencies, obviously euro just continued to drift lower and lower yesterday. Just making this chart as small, uh, as I can. Obviously marking up those double lows from, uh, the 23rd and 30th of May. So that's not too far away from where we're trading at 1.1211. Obviously got the data coming out very shortly, not just from, uh, the French numbers that we've already come out with. Germany in 1 minute, which I'm sure Anthony will put in the chat, and then the euro numbers as well. So just be very bit careful, but certainly technically 112.11, the futures just before the pivot, looks pretty key to the upside. Uh, if you were looking to, to go long, uh, I mean, obviously you'd wait for the data anyway, but with these things, pretty worth seeing if you can get any of the kind of trend line in the mix. And you can see we haven't quite yet, but something similar to this where you got your 1, 2, possible third test, and then on a break of that you get that relief rally, uh, to the upside. But for now, uh, you know, if the French numbers are anything to go by, it's not going to be looking too good, uh, for, for the moment. The pound, quickly having a look over, we did just drift up towards the, the pivot, and you can see we are trending lower as well. So similar, just to see, can we get any kind of trend line in? It has been messy on the way down, obviously, with, uh, the reaction to Boris perhaps not winning by as big a margin did push us up the pivot where we had some previous resistance which acted as the high of the day. Certainly to the downside, I would be looking to, to have this on and almost really waiting for a reaction outside of the two. While you have a decent range opportunity around the high of yesterday and the, the R1, you've got some support around the S1 as well. Just seeing price just getting squeezed in from both directions here. Those lows certainly getting, getting higher and the highs getting lower. Might be worth just seeing what happens if we were to break out either way, much similar to oil and S&P. Uh, 43.1, they're pretty low. So have a quick look over to the euro dollar here, which you can see as expected, it's just pushed to a new low there, just testing the S1 for the day. Um, decent, uh, decent miss there. Um, the services was better, but manufacturing really low there, 43.1, and their composite worse as well, 51.4. So those numbers are in the chat for you guys to, to have a look at. We'll have a quick look over the DAX as well, which you can see just coming under a bit of pressure itself off that worse-than-expected number. Just bear in mind though, if that euro was to weaken considerably, um, you may find a bit of support there. The Bund on the flip side is absolutely skyrocketing uh, look at that on a minute. That's a massive move there in the Bund. And ahead of ECB day tomorrow, I'll be definitely interested to see what happens there. And that's obviously the new all-time high there for the Bund. Really, really strong move. And just looking at the previous days, it's the most it's moved really since going back to, to the 18th there of June. So massive move there for euro-related products. I was looking 7-year low for the manufacturing, uh, Anthony Cheung, which is incredible. Just having a look actually at the, the euro-pound. This was a market I was looking at yesterday, and I did tweet this. If we were to get a close below this level, which we didn't, but we are now below there, I think from a medium-term short opportunity, I think it looks quite good. Um, although obviously, you know, the pound not necessarily looking too rosy, the euro in a situation where The dollar is obviously on the, you know, euro dollar's on the low. A break of this targeting certainly at least to the low of July and maybe even that 22nd of June low as well, something that I'd be focusing on. Having a quick look over at gold just to finish things up. Obviously the euro moving quite strongly now, uh, so we'll get— let you guys crack on. But the— certainly from, uh, another pennant or trendline point of view for gold, you can see from that high that we had on the 18th, I would definitely be looking to, to see what happens should we get back up to test this, this trend here coming in around 1425 on the futures. And we're also getting squeezed in to the downside as well, so be worth seeing what happens should we get a break either way. As we've seen in previous days, when those breaks do happen, you get a a longer lasting move. So certainly would have that on trend lines formed from the top of the 18th to yesterday's high and, and see what happens today as well. As usual, any questions, obviously please do, uh, let us know. We've got the, the numbers coming out of Europe in, in half an hour. Um, if we continue to push down, obviously you've got to just factor in that, that a lot of that would be priced in even if the euro numbers are worse. So just be slightly careful out there now. But, uh, hope you have a good trading day and I'll catch you in the chat.