What Next For Brexit & GBP?

Okay, very good morning. It is Friday the 11th of September. Hope you're doing well. Just gonna run you through some of the main kind of fundamental headlines from this morning and an outlook for the day ahead, final trading day of the week. And gonna start off with— I'll talk about Brexit in a moment, as you can see to the side of me, but let's So let's start with the charts. And one of the main things here was quite a breakdown in US equity indices yesterday, moving through what was an area of support. You can see in the center charts here in the S&P in the center right, a breakdown of what was a support level throughout much of yesterday's session at around 7 PM London time. And that coinciding with a similar technical setup in the likes of the NASDAQ as well. So a breach through there, markets were a little heavy. The latest that we've had on, on US Congress is that Democrats have blocked the Senate Republicans' whittled-down $300 billion coronavirus aid package as the prospect of passing then more relief to households and businesses by the US election date of early November continues to be a fairly slim prospect at this point in time. So did dampen sentiment a little bit. We also had US lawmakers still remain pretty far apart as well on one of the other contentious issues at the moment, which is how the US is dealing with China. Basically, Trump said he will not extend his September 15th deadline for ByteDance to sell its US operations to TikTok Video, or on the TikTok video sharing app. So differences in opinion of the best way forward with that between the Democrats and Republicans as well at the moment. So Yeah, that caused a little bit of attention, but yeah, technically we broke through, but— and there was quite a large sell-side imbalance into the close last night on Wall Street. But since then, pretty quiet overnight Asia-Pacific session, and we've continued to just reverse course and find a bit of a footing now as we in the futures market trade quite a bit higher already. And you can see that point of break in the NASDAQ, we are already back above there right now if we were looking at the current market price action and trading above pivot. And actually, on a longer time frame, I was just looking at the, the NASDAQ 100 on a daily continuation this morning. There was that long-standing trend line that we were looking at, kind of dates all the way back to April, so since the initiation of the recovery post that March sell-off that we had on the pandemic. And there was a couple of tests on that point when EU COVID fears were materializing towards the back end of July. But then we had those mega-cap earnings that really outperformed, and we pushed on since there. We can see previous other tests at around the, that trend line. Interesting then to, to where we're at at the moment. Obviously, we've had a pretty decent correction in markets overall, uh, obviously a holiday-shortened week if you're in the States given the Labor Day holiday. But here then, we're trapped on a slightly higher time frame between some quite interesting areas. This line here, that's the 21 DMA. The bottom colored line is the 50 DMA. So at the moment, price activity over yesterday's session was very much caught in between those two areas. On the upside, that 21 DMA does coincide with that trend line, and you can see back on, on the 8th, we respected that. We respected it yesterday as well. So definitely be keeping an eye on that as an upside level. Whereas on the downside then you've got the 50 DMA coming in, which was also respected yesterday. So quite interesting being kind of wedged in between that and then the upside, the, the kind of dual combination of that DMA with the trend line is something to be aware of. With as well, if you put a horizontal line, a double top now from the 8th and the 10th of this week would be quite a key upside obstacle now on any further recovery if that was to take, take place. As far as the S&P is concerned, as I said, a little bit of a sell-off yesterday, a bit of a breakdown towards lows to find a bit of support around these prior areas that we saw back on the 8th on the evening, and then the rally that commenced on the European morning two sessions ago. So got to that point and we've had a bit of recovery and we're just hugging pivot at the moment And the upside levels to keep an eye on if we continue to push higher would be up at around that kind of area of 3361.75, and they're kind of tracking the move back up if that were to be the case. And you've got that double top at 3414, and obviously the 3400 level and R1 on the way if that was to materialize throughout today's session. Um, one of the other things then I wanted to, to talk about was the FX market. Quick look at the euro, and then we'll get stuck into the Brexit side of things. Obviously the euro has been in focus this week, of course, particularly given the, the ECB meeting. And if you, you missed our live session yesterday, it is available on the YouTube channel. You just go down to the live session recordings category on the YouTube channel, you'll be able to find it and review it if, uh, if you wanted to. But yeah, the last 48 hours of price action has been pretty interesting. You had that initial quite explosive move to the upside when those ECB sources came out, which were kind of talking up the optimism of markets. And we talked about this at length yesterday, about how that perhaps could have been a coordinated effort by the ECB to, through the backdoor avenue of sources, to try and just prop the market up a little bit in terms of its pre-event positioning, uh, just given the, the general expectations were that they were going to kind of toe the line. And which may have perhaps then disappointed the, uh, the doves in the marketplace, and therefore could have created quite an aggressive rally in in the euro currency. And, and that did actually end up being the case. I mean, of that matrix that you remember I was sharing yesterday, it was pretty much the top scenario, which was the, um, you know, not— they're not particularly spooked at this point. They didn't really make— it was a real soft touch in regards to any referencing over the euro currency rate, which obviously a lot of people were looking for. And that in itself contributed to quite a large pop here in the euro. However, if you look at where we are at the moment, I mean, net-net, we're pretty much scratched to where we finished, um, after this session back on the 9th, after that initial source commentary. So despite some of the volatility that was seen yesterday, I would say overall it's a fairly contained move considering how important that ECB decision was. It's failed to really maintain direction in either way. In a bigger picture perspective, obviously It's going to be quite interesting to see, uh, do we continue to see a push up to, to 1.20 in the end? That obviously is the key area on that long-term significant trend line, which we've— what is apparently made quite clear and present. There used to be a little bit nervous and concerned about the strength of the euro, and although Lagarde not willing to really be more definitive on that point, it's certainly the lack of talking it down does open up prospect potentially of a further move higher. But obviously we'd want to be tracking dollar developments as much as euro developments to see whether that plays out. But at the moment, this morning, it's pretty quiet. It's basically in consolidation mode through much of the overnight European session. On the downside, if we were to trend lower today, I'd be looking at those initial lows that were seen into the US close last night. And on the flip side, if we start tracking higher I'd probably be looking at first port of call around here, which would be 118.73, which would be these previous lows. And you've got the high here, and then just tracking that move back higher then to the, the highs that we've seen going back to the beginning of all— or beginning of September, excuse me, 3rd and the 4th on that double top and that area of support that we saw post the ECB going into the European fix. In the FX markets yesterday. So let's look at sterling then, and we'll talk a little Brexit. And yeah, it's been a continuation of real pressure for the sterling currency, and I'll go into it in a bit more detail on the fundamental side. But just looking at the technicals here, I've marked it up with the— what has been actually a 5% move This is going back— this high was printed at the beginning of September, so over the last 10 days or so, the sterling currency against the greenback has lost about 5%. Johnson threatening to leave the EU— this was going into that 8th round of talks, which obviously have finished now as of yesterday. And then that resulting in this new internal market bill being issued by Boris, that throwing into jeopardy then the legality of adhering to the rules of the withdrawal agreement, which was agreed back in January of this year. And that has led to the EU threatening legal action. And so continuation of downside pressure on, on sterling, finding technically though some support around, uh, what is a key area. That's that previous high that we had back in June. Before then, actually, we saw a very meaningful pullback in the period thereafter through that month. And so we got back down to that level yesterday, brief flirt and run down to what is the 200 DMA, which is the blue line. And that's also been a quite a keenly watched level as well over the last couple of months of price action. So yeah, this ellipse here would be quite key area of support now at this 128 handle as to see where we finished the week. I'm quite keen to see. And a lot of conversation we had yesterday with some of the traders internally was about, you know, how much has it got to go for this to be priced in. And we were kind of looking at a chart, much kind of longer dated, to encapsulate a little bit of the 2019 price activity and the kind of transition then over from Theresa May over to Boris Johnson and the market's pricing even before he officially became PM of the risk of a no deal, given that his stance was well known. And that was when we were trading more around kind of the 120 area, 121, when it came to sterling. So with all things remaining equal, and as I'm going to discuss a number of other things we're looking at in the UK from a fiscal point of view, potential monetary policy implications, there definitely is room with the, the risk of further material pricing of no deal that this sterling currency can remain under pressure going forward in the coming weeks. So let's, let's talk about some of the fundamentals then on the headline side. So during crisis meetings yesterday, Boris Johnson's government rebuffed an EU request to scrap his plan to rewrite the Brexit divorce accord, or otherwise that known internal market legislation which came out on Wednesday. And this comes even after the bloc gave him a 3-week ultimatum to do so or they threatened legal action against the UK. Michel Barnier said that UK has not engaged in a reciprocal way on fundamental EU principles and interests, and significant differences remain in areas of essential interest for the EU. And we had pretty much the mirror statement coming out of David Frost, his counterpart for the UK. The negotiators though, they do plan to meet again next week in Brussels You can probably envisage then that these talks will now intensify as the kind of soft deadlines in October, which were initially looking around mid-October for some sort of tentative deal to be struck, at least in a loose framework agreement, and it's probably going to see then week after week negotiations going forward. A few other things then have happened just given this, this UK change of stance, let's say, particularly that legislation they brought forward in the middle of the week. Johnson is facing a revolt by as many as 30 Conservative MPs over that particular bill. Is that a shocking and problematic number? Well, it's definitely going to create some media noise, but I don't really see it given his resounding, what, 80-seat majority he has in Parliament, it shouldn't really prove to be too much of an issue in terms of the Commons. But when it comes to the House of Lords, which typically tend to be a little bit more, uh, euro-friendly, I'm sure that they're gonna do what they can to slow down the speed of passage of that bill, which is likely to just zoom through the lower house. And that could again be a contentious issue for internally Boris Johnson and Conservative parties to manage. A couple of banks have been commenting on the situation. Goldman Sachs said the British government's moves were intended to extract concessions on the UK's ability to diverge from EU regulatory standards while still enjoying zero tariff, zero quota access to EU markets after the transition period ends at the end of this year. They're expected— the perceived probability of a breakdown in negotiations to escalate over the coming weeks. But their base case remains a thin free trade agreement. And at this point in time, I, I tend to agree with that statement. I think things are going to get a little bit worse before they get a little bit better. Hence, this is the normal process of Brexit negotiation, which we've seen many times before. And I do think, as what some of the media referring to this game as brinkmanship, can go wrong. But we've been here multiple times before when it comes to Brexit, and in the end, although sterling must reflect this, including this renewed risk, we tend to see a general positive outcome or a delay in kind of cliff-edge type scenarios. So I don't see any reason why that wouldn't be any different this time around. One thing that, that some people were looking at was, um, overnight sterling implied volatility rose to 13%. That's the highest it's been since my birthday on March 26th earlier this year, and obviously that was right in the middle of the peak of the pandemic rout that we were seeing in markets. So we've got over the peaks that were seen in, in June and late July, early August, and that was that latter one when the, the US outbreak was happening in some of the Sunbelt regions. Implied volatility gauges for other maturities are also elevated, including the 6-month options contracts comprising then the end of now. If you think about the calendar year, that encompasses the end of the transition period, and that stood now close to its highest since mid-May. So some of, some of the pricing would be indicative then that things certainly— people are positioning themselves to get, get worse essentially, or more volatile. If you think about it, then there's kind of multiple factors then are weighing on this sterling that have really created this decline over the last 10 days or so, whether it be UK economic data generally losing a bit of momentum. We've had a rise in UK COVID-19 cases, we've had a tightening on social gathering guidelines as a result of that, and we've got fiscal tightening potentially very close on the horizon, and the particular one being furlough finishing at the end of next month. And that in itself, furlough is still being used by by some 9.6 million people in Britain. Um, that's being talked about a little bit in the press this morning. I've mentioned this before about whether or not Rishi Sunak might have to extend that program. I think that that probably will be the case, but in a little bit more of a strategic sector-based way, continuing the program according to the Treasury Number 2 Stephen Barclay. He said yesterday that extending furlough overall would only serve to keep people trapped in a job that only exists because of the furlough scheme. I can kind of see the point there, and this is the difficult thing that the Treasury now in the UK needs to weigh up, is do they want a mass flood of unemployment in the millions, which is only going to further not just impede the economic recovery, but it's also going to damage the Conservative Party's political favorability. So do you stump up the cash and keep paying for that? But ultimately, at some point, it does need to finish. And there probably is some legs in that argument that there's a lot of people who are just trapped in a job where an employer, perhaps in a small, medium-sized business, is happy to keep you on because the government's backstopping 80% of your wages. But if that's pulled, then some of these companies are going to have no choice anyway but to let you go. So your job's already lost, you're just caught in this kind of gray area that furlough is, is maintaining that employment for the time being. The way they could approach this, and probably I think the way that it will work, is the Treasury might well extend beyond October for targeted areas in terms of job sectors, so particularly those that have been most hard hit. So things like tourism, hospitality, leisure, these sorts of things which have had to go on complete lockdown obviously because of the nature of social distancing. So yeah, I mean, number of factors then to weigh on this. Obviously as things get worse, if that were to be the case, then does that create then more necessity for the Bank of England, although they've kept things like negative rates on the table, does it push us more more further down that route. So more reasons accumulating for, for further softness coming in the currency going forward. But hopefully that's a good overview. Um, quick mention about COVID I know it's been pretty quiet on this front for, for a little while, but I just wanted to give you a bit of a brief overview. In the US, the number of new cases still moving down generally. The 1-week rolling average now below 40,000 new deaths. Hospitalizations continue to decline as well. So yeah, at the moment it's still, you know, when it comes to this sort of thing, it's really not that much of a talking point comparative to what it was just around a month or two ago. But I still do keep a daily eye on, on it just to make sure that generally two things. One, I think it's quite important not just to look at cases And a good example of this is the— what's happening in the UK and Europe, because the number of new cases in Europe continues to increase at this point in time, and nothing is suggesting that that will, will stop anytime soon. So we are expecting case numbers to go up, particularly France, Spain are the worst hit at the moment. The number of new cases in the UK is now accelerating at a faster pace, particularly as well as you know, the youth. We've got Freshers' Week coming up next week, I think, and if Freshers' Week's anything like I remember back in the day, I'm not sure there's going to be that strict a social distancing. And perhaps then the reasoning of why the government made their move this week to initiate that from Monday, specifically given the fact that it's 17 to 21 year olds that have been the major issue with the acceleration within the UK in terms of a demographic. But, you know, kids going back to school, the potential transmission then onto their older relatives and so on. So things are getting worse on a, on a case basis. But, you know, the most important thing here is I'd look at the data as a whole. And actually, new deaths in Europe remain stable despite new cases have been rising since July. So could be a couple of factors here, and here are a few. Um, and there could be multiple. So more young people getting infected, and generally their ability to be able to cope with contracting and then fighting off the, the virus is seen as more effective than that of the elder generation. More testing, better knowledge on the treatment, hospitals not under so much pressure. So, you know, hence the reason why politicians, despite numbers going up are a little bit reluctant to implement too strict, or too strict a movement on curbing the virus due to the high level of economic cost that it would entail to the economy. So this is why perhaps there's a bit of a disconnect between you read the press and the numbers going up, and yet the economy is trying to reopen and they're moving forward with that plan, the push to put people back to work and so on. That's because underlying it, actually, more people are getting it, but it could be down to other factors, and it's not resulting in tangible deaths in the end. So yeah, at the moment, as long as that remains the case and that latter part doesn't start to pick up in step with the case numbers, then I don't think it's really going to have too much of an impact on markets for the time being. But something to remain vigilant for, of course. On the note of COVID-19, I did a tweet this morning. My Twitter handle's here if you want to get these crib sheets. But I saw a really great research report from Danske Bank, and here is a great table looking at the vaccine candidates that are currently in Phase 2 and Phase 3 clinical trials. And you remember, uh, University of Oxford, AstraZeneca's one's been the one in focus, of course, this week, midweek, with that, um, that scenario that we saw where they briefly have halted their their latest trial. And so that's number 1 here at the top, but it's really useful to be aware of what are the other 9 currently in phase 3, um, what type of vaccine are they, how many doses, timing of doses, you know, just to give yourself, you know, if you know markets are sensitive to a certain issue, then it's prudent if you're going to be an agile, active headline macro good trader, then you should have a base competency of at least having a, an understanding of these things, because these are what markets will move on if a certain headline was to hit the tape. On the tweet, so you've got that table, the different types of vaccine, how soon can a vaccine be ready in terms of timelines against normal procedure, because obviously everything's been accelerated. Governments will to expedite their usual drug approval processes in order to get the vaccine out as quickly as possible. And then the vaccine development phases— what exactly does this include, you know, how do we get to the point of approval status, and so on. So it's good to have a little bit of base knowledge on this. And for the Amplified Traders, I distributed the full research report to you guys earlier this morning. All right, quick look at the calendar for today. UK data's already come out and it hasn't moved the pound. I wouldn't expect it to. The, the GDP number, it comes as no real surprise at this point in time. We're already kind of fully accustomed to what the status really is there. So the month-to-month reading was at 6.6% against expected 6.7%, so minimal change. In terms of some of the other data, the industrial production month-on-month 5.2% above the expected 4%. Um, the trade balance was a deficit of £8.64 billion against expected deficit £6.9 billion. So it's not really too much to comment on. UK construction output deep contraction, but not as bad as analysts were expecting. But overall minimal reaction in the pound. I would not be looking at that to supersede the other factors which I think are more dominant at this point in time. I think the fallout of the Brexit situation, all the although I think largely priced in, in terms of what's happened this week. I think that is reflected in price. That doesn't detract from the point then that there are multiple threats facing the UK pound at the moment. So fundamentally, from a directional bias, it's still short at this point in time for us. Um, yeah, back on the calendar then. What other stuff have we got? We've got the US CPI numbers. They're really the only major feature this afternoon. And, you know, given the move in policy now from the Fed to move to average inflation targeting, perhaps a little bit interesting. But in fact, now perhaps inflation data like this, specifically CPI, takes a lower precedence because of the fact that now it's not so definitive that we're looking at 2%. The market can run hot above that point, and to be quite honest, we're nowhere near that at the moment. And even though inflation has been picking up as the economy in the US has started to reopen. And so naturally then we see the demand start to pick up once more. We are expecting this, this pattern to continue, albeit perhaps not at such a rapid pace. I think the consensus estimate is for 1.2% on the, on the year-on-year figure. But I wouldn't be expecting too much from that. As I said, we're still away from, from 2%. and the fact that inflation can run above and below now given the new policy kind of system, I don't think that's going to be a real game changer for today. Otherwise, Baker Hughes rig count, usual for the, for the oil traders. A couple of speakers coming out later this morning: ECB's Schnabel at 9:50 London time, ECB's Lane talking at 1 PM. And just given the context then of Christine Lagarde speaking yesterday. Usually would be uncommon for, um, something to be said explicit that would be any different from what Lagarde has said, because she speaks on behalf of the ECB. But if they felt the need to kind of re-emphasize any points or re-guide the market, then these two speeches could potentially provide a platform to do so. So worth keeping an eye on. And then for fixed income traders, reminder, you've got the Bund, Bobble, Schatz futures expiry happening late morning, 11:30. All right, that is it. I'm going to let you get on with things. If you don't already do so, do not forget to subscribe to the channel. I've had some really great videos this week, not just the standard kind of macro briefings in the morning, but, you know, breaking news about AstraZeneca. We've had video about Tesla from Eddie and we've one about SoftBank. So yeah, new content coming all the time. Great to have you guys engaged. And with that, I wish you a great weekend. I'll see you on Monday. Thanks very much.