What Next For Markets As Virus Concerns Increase

Hi there, I'm Anthony Cheung and I'm the Head of Market Analysis here at Amplify Trading. Every weekday morning I'll deliver a fundamental rundown ahead of the European Open, but if you subscribe to the channel you'll also get content from the rest of the team. So let's begin. Good morning, it is Tuesday the 22nd of September. Hope you are doing well. Quick shout out to my wife. 10 years today since we first met. Time flies when you are having fun. I did say to her yesterday, 10 years would be almost a life sentence in some worlds. But anyway, moving on, a quick look at what we've got on the agenda this morning. What I'm going to talk to you about is a little bit about the overnight session, lower generally overnight. Continued beaten down in terms of some of those big banking stocks like HSBC and Standard Chartered in their Hong Kong listed shares following that news about US anti-money laundering and their involvement potentially in that type of activity. So Asia lower overnight following on from the Q, from the lower close on Wall Street. We did see a bit of a late bounce actually, particularly tech-led going into the closing bell, which did narrow some of those losses, but generally lower. Japan still out on a market holiday. We had some comments from Jerome Powell last night, but largely a reiteration of what he said before, very much just unveiling, I guess, his defensive policies that exist to now politicians, which he's going to be speaking to throughout the week on Capitol Hill, virtually at least. An update on the UK COVID situation, obviously it's moving fairly quickly at the moment, and the PM is going to give a major speech later on this evening, and there's some big kind of policy U-turns about people now being encouraged to work from home. There's going to be some hospitality industry changes in regards to bars and restaurants, and I can get you up to speed on that. But definitely this could have— well, have implications on the speed and shape of the recovery in the UK, and that does need to be factored into the pound, which obviously was really the main focal point of yesterday's session. Not just the UK, but mainland Europe The idea of then the kind of slow progression on stimulus talks coming out of the US, the simmering US-China trade situation, all of these things rearing their head at once and causing that negative session that we had yesterday. And then other things I can update you on is oil, Tesla, and the calendar ahead. So before I get into these stories in more detail, let's have a look at the charts. And what have we got? On the agenda, uh, and a little bit of a slight repeat of where we kind of left things yesterday. The dollar has just started to bump up a little bit after a very sideways Asia-Pacific session, and a little bit of strength here in the DXY has seen it come back towards basically unchanged on the session, in close proximity to yesterday's highs now in the DXY. And as a consequence, I'd be keeping an eye today on these major currency pairs once again on the downside levels. Yesterday's low following the route that we had with the dollar-led strength weighing on these major dollar FX pairs, then 1.1750 in the euro worth keeping an eye on. Cable actually even closer toward those lows we printed yesterday, uh, which came in the evening around 6 PM London. We're trading around 20 pips away from there at the moment. Looking at sterling from a slightly longer time perspective, there's a really key area of course which the market responded to very nicely which was the 200 DMA, um, only a matter of weeks ago, 10 days ago or so. And that was a key pivot point from when a lot of the focus, of course, wasn't so much on COVID but on Brexit, when Johnson was playing the strong hand going into that 8th round of Brexit talks, which obviously finished with, uh, the presentation of the internal market bill coming out the UK, and that got Europe's backup and so on. So the deterioration of that increased risk of a no-deal, that pricing hit that eventual low back on around the 11th before we bounced back up. And here we are back down at these key levels again. Again, that also encapsulating around the highs that we were seeing on the recovery through May into early June as well. So quite interested to see how the market reacts here around these levels. You can see here technically that low on the 11th was also marking up some highs around the 21st, 23rd of July before the break higher. So we are within distance of there at the moment, around 50-60 pips or so to the downside. And that for me, if I just put an ellipse around here, this is going to be a really key area which could come into play later today as key area of support. A break of that, then I'd be looking for a deeper move down to around 126.74, looking on the daily continuation here. And then the next really technical level of interest isn't seen down all the way to more toward the 125 handle. And obviously you've got to take out 126 even as well. On that descent if that were to materialize. So key day, um, dollar is seeing some strength here at the European Open, so definitely be mindful of that. Um, elsewhere otherwise, gold has had a pretty decent bounce and it's recaptured a 1900 handle, of course, following the quite abrasive sell-off we had yesterday, which was very reminiscent of what we were seeing during the portion of that, that kind of unwinding of the big tear that Gold went on through 2000 initially, and so we're just trading around pivot at the moment, um, and just keeping an eye on the range here in gold futures just as we go through the main pickup in volume through the European open. And that being the Asia-Pacific low that was seen down around 1911, and we're just testing there at the moment. And that could be interesting if the dollar does continue to pick up and accelerate on the upside, be looking If we get a triggered break on there, we could see a deeper, heavier move back down to $1,900 again in pretty quick fashion, given how gold as an asset typically tends to move on these breaks of technical levels. Otherwise, elsewhere in the equity space, obviously negative sessions yesterday, albeit quite an aggressive bounce off those lows into the final half an hour of trade on Wall Street. Um, obviously we were looking at the daily chart yesterday, and hopefully my briefing kind of made sense because yesterday did kind of play out as we were describing, in that we broke technically that 50 DMA and trendline. A lot of negative COVID news, talk about UK second national lockdown, albeit we're not quite at that point yet, but new restrictions coming in, similar developments on COVID front elsewhere in mainland Europe. And we did think that equities were susceptible to a pullback, and we were looking at those lower down levels and And certainly the market did respond to some of these predetermined marks that we were looking at from the initial high that we saw from the US-China situation before that kind of intensified. And the second wave also started to hit in regard to in the US and the Sun Belt region. That was that high we printed back in early June, if you remember, the kind of southern and western states in the US. And so yeah, market responded to that. But look, we're under a bit of pressure again, just going European Open. So that continues to remain a key level, and anywhere below there, definitely 3200, 3192, which would be the support level that was really a strong level through from mid to late July. Before then, we started to accelerate to the upside. That would be a very important level to keep an eye on. Meanwhile, in in oil following the general kind of demand reaction, I guess, to an increased threat of COVID concerns globally. It came under some pressure yesterday, so just still be keeping an eye on that for the time being. It's down 10 cents this morning, it's relatively flat, but as you can see here, finding a little bit of resistance in the overnight Asia-Pacific session at around the $40 handle, which is just short of the pivot and also that low point that we printed back on the 17th. It's quite a nice area of technical resistance, uh, kind of around this area here. If we get back down to retest the lows that we saw from yesterday, um, we'd be keeping an eye of course down at that low that we printed, uh, more like the 38, 83, 85 type level. I'm going to talk about oil in a moment. There's some other stories to be aware of as well. in regards to Libya, that's probably worth commenting on as well. Fixed income markets, T-notes pretty flat, obviously caught a bit of a bid, in yesterday's session just given the equity sell-off, uh, general, uh, kind of flight to quality move that we're seeing, um, but since then has steadied, albeit held on to some of those gains that we've seen yesterday, and we're trading, uh, with support the pivot up a tick of 139.19. All right, let's get into some of the headlines. What have we got then? Let's, let's focus on Um, as I said, overnight in Asia, a negative session. As I mentioned, HSBC, Standard Chartered shares were down again, another 2.5% or so. That takes the 2-day loss for those banking giants down to around 7% now. And again, just to repeat, that's after then they were named in a report about alleged international banks that have flagged $2 trillion in suspicious transfers to the US anti-money laundering authorities. So the this had weighed on other banks as well, DB being one of course yesterday. Um, other things that we talked about yesterday, which definitely was, I think, a contributing factor as well to some of the general mentality towards the negativity yesterday, was when we were talking about this, um, the passing of Supreme Court Justice Ruth Bader Ginsburg and what the replacement of that might mean. It's a real contentious issue now for politicians in Washington? And does that detract from the timeliness of getting a next round of fiscal stimulus coming out of America, which is obviously crucial to support what is still a fairly precarious and fragile recovery at the moment? So those were all yesterday. Jerome Powell did speak last night. He didn't speak so much as in his text got released of where he's going to be speaking later on today to the House Financial Services Committee. Powell said that the US economy— flash it up— US economy is improving but has a long way to go before fully recovering from the coronavirus pandemic. So this is the text before he's scheduled to deliver these comments live later today. He does speak actually 3 times this week. He's of course going to be joined as well by the Treasury Secretary Steve Mnuchin as they appear before lawmakers to to talk about the various different monetary and fiscal responses that they've put into place since the pandemic began and how they're looking to support the economy and where things might go in the future. Generally speaking, these types of events when central bankers speak to politicians is more about defending their decision-making, the success or not of the policies in which they have implemented. The politicians typically say they should have done more, they should have acted quicker, and on. So it doesn't really have too much in the way of market-related implications. However, of course, this is two very senior people speaking, and of course Powell has the propensity to move the markets violently should he say something off cue. But the likelihood of that is particularly low, so I wouldn't be expecting too much from this, but just to be aware of. So that leads us then into one of the main stories, which is in the UK, a really fast developing story. And the latest news I'm sure you saw last night was that Boris Johnson, the Prime Minister, will announce new restrictions on bars and restaurants. Hospitality venues across England will have to close by 10 PM from Thursday and will be limited to table service only. He has also reportedly told MPs that he'll be telling the nation tonight that people should work from home if they can. So continued political pressure here for the Tory government because, you know, there's a lot of changing of policy that's happened multiple times, a lack of then therefore clarity and what people's understanding are of restrictions for one. And this whole idea of encouraging then people back to work, which has been quite a mainstay of general comms coming out of Number 10 for the last couple of weeks, that's going to get flipped, just given the gravity of the situation of what the medical advisors in the UK were unveiling yesterday. I think strategically, from a political strategy point of view, very purposefully done. Boris not talking at those events, leave that to the medical guys, and then he can come out and strike a slightly different chord, of course. And then he can just act or say he's acting upon medical advice. Let's slightly disassociates himself from the end result of economic implications in terms of job loss and so on. So I think that all makes sense. Um, just to recap, the chief scientific advisor Patrick Vallance warned Monday that the current infection rate, of which the number of cases is doubling every week, could lead to 50,000 new cases by mid-October without urgent action, meaning the alert level is now being moved back from 3 to 4. Which basically suggests now rising rapidly and probably exponential growth of the virus. Now, that headline— I think it was 48,000, 50,000, let's say, new cases by mid-October— that sounds incredibly sensational, and obviously the media jumped on that. Now, I wouldn't be surprised if I was, you know, thinking of, again, strategy from a government side, that that was purposefully done This, this virus has to be taken under control, and one of the main things is people's adherence to the rules and the restrictions being put into place, which obviously has been fairly loose, as we've seen from the lack of social distancing that's been present over the last couple of weeks. It's kind of led to a large portion of this situation. So don't believe though the 50,000 by mid-October. You know, the way that this works is kind kind of like when in the banking sector we do stress tests. And so when we do stress tests, for example, we would run an economy through multiple different scenarios ranging from ultra-positive to absolutely almost a devastating scenario that might occur, like a black swan event, to see whether or not then the bank— the banking sector can withstand an a shock of high magnitude. So here then, it's kind of a similar type thing. I think the press obviously have an agenda, and it's obviously a great headline to run about, you know, the amount— how violently the virus is growing. And so yeah, I'd just be mindful of the fact that— don't, you know, be a little bit more reading between the lines of what the government's doing here. I think it's government-led, trying to control. If you can scaremonger people to a certain degree, and they will become more in line with the restrictions you're putting in place. But equally so, the media have an agenda to push these types of sensational headlines. So 50,000 is unlikely to happen, it's a very low case probability, but does certainly explain then the actions and gives validation to what the government is likely to do today and in the coming weeks if we lead to more nationwide type lockdowns. Now, what does that mean? Well, economically, the reason why the pound's come under pressure is that even just a 2-week shutdown, which was being talked about in the press, in the FT, just a couple of days ago, about the potential half-term period in the latter part of October as the potential for a 2-week shutdown, that in itself, according to analysts at JP Morgan, could knock at least 2% of the nation's GDP. So, so remember the entire main lockdown we went through, through the period of April really, was when it was at its most strict. That basically caused second quarter reaction of a negative 20% growth in the UK. So every day that happens, it has implications on the economy, and it's even just a 2-week shutdown could add another 2% in terms of the potential potential for the UK and altering its trajectory of recovery. So hence the reason why this is a real delicate decision for the government to make is there's obviously strict, huge implications for the economy. To give you an idea though, I think what will be quite interesting is Bank of England Governor Bailey is speaking in actually an hour's time at 8:30 London time, and a lot of people will be quite keen to what he has to say following the Bank of England meeting last week, and they were talking about the fact that they've now started to speak to regulators about the implementation of potentially what would negative rates look like and how would it work. That's the most progressive conversation we've had on that particular policy tool, and the markets are kind of quite interested to see whether he provides any more insight on that matter. As I said in yesterday's briefing, I probably think it's less a case that he's going to be that explicit. Given the fact that he's kind of done his job. He's moved that talking point along, but he doesn't want to overcommit. And so Bailey is speaking though, and given the context of what's happening, certainly with this evolving COVID situation, it's going to be quite interesting. Remember, Bailey speaks today and Thursday, and then PM Johnson is going to speak later on this evening. And actually, that's going to be at 8 o'clock. That's 8 PM London, where he's going to give one of his speeches about how they're confronting the virus and unveiling these latest measures. So yeah, it does put more downside risk on the pound, and that was already present given the backdrop of what would have been happening with the fairly wide gap still between the UK and Europe in this Brexit negotiation. That's kind of been parked now, and what the market's looking at is the implications of how bad is this coronavirus situation. So again, sterling FX will become slightly more sensitive to these daily updates and toward then how big are the leaps that are happening, and then what are the consequent actions that the government puts in place. The more onerous they are, the more impactful on, on the UK economy that will be, and the more downside pressure that's going to add to sterling currency. And as I said, there's some technical levels around that 200 DMA will be quite, quite key. Let's move elsewhere just to wrap up things. Continue to keep an eye on the, the general weather patterns in the Atlantic. At the moment, it's been particularly busy in different systems, and particularly Beta now is the one that people are looking at. As you can see here, tropical storm in the Gulf. Now, directionally, quite interestingly, it is basically moving perfectly along the Texan coastline which is where the main bulk of the refining facilities do reside, in that geographic region. However, from what my understanding is, is that this, the speed and intensity is nothing like what we saw, say, recently with Hurricane Laura. And so worth monitoring given the fact that where it's, where it's anticipated to go. But at this point, unless it takes a surprising turn and starts to intensify quickly, then I don't think it'll be too much of a, of a moving point for, for oil intraday. A few other things here though for oil. Obviously it was lower yesterday, prolonged coronavirus restrictions weighing on the kind of demand expectations here for energy products. One other thing is Libya. I know Libya you probably heard about yesterday, but they're moving closer to reopen— reopening parts of its obviously obviously a very battered industry for oil, just given the ongoing civil crisis that they've been going through for many years. But companies have been told by the government at some fields that are free of foreign mercenaries and fighters to restart production. Now, what does that look like? And Libya is a country that can fluctuate hugely. If you're not used to these production numbers, Libya in, in the in the, in the height of civil unrest can literally go down to 50,000, 100,000 barrels per day being produced. When things are the opposite and there's an ability to switch on their, their network again, they can go in excess of a million. So the variance is, is actually quite large. And I know in the grander scheme of things, when we talk OPEC, we're talking about 30 million kind of plus type level. However, don't forget the the size of the types of supply cuts that we're talking about when we talk about OPEC+, and a change of one nation by several hundred thousand barrels per day really does jeopardize the OPEC deal quite severely. An analyst at Goldman Sachs have been kind of looking at the numbers, and they anticipate in their forecast that daily output could rise by 550,000 barrels per day in Libya if of course, all things remain status quo, uh, and those facilities are able to open without disruption from militants and ongoing fighting within the country. Um, so that definitely would be another component to monitor for the success or not of this OPEC ongoing plus deal that, that's in place at the moment. Um, yeah, moving on, final thing. I did tweet about this last night, just I just happened to be at my desk last night and I saw Elon Musk was tweeting and he tweeted this. And I don't really look too much and we don't trade at Amplify single stocks, but obviously Tesla's always a talking point and Tesla's got its shareholder meeting and its Battery Day happening today. And so he tweeted last night, important to note that Tesla Battery Day unveil, unveil, which is today, this affects long-term production. Especially Semi, Cybertruck, and Roadster. But what we will announce will not reach serious high-volume production until 2022. And their shares consequently in aftermarket did fall in excess of 6% at one point. They actually finished in the aftermarket trade down about 5.9%. A quick, quick word on this then. It's interesting as an example I think that if anyone who's new to, to trading, and they're definitely new to the fundamentals and how markets react to price, and one thing that's very common is market reaction in stock prices often are a reflection of human psychology. Now let me just, before I get too deep, let me just give you a very quick overview. So negative bias refers to the fact that humans tend to overly focus on negative events in terms of information or emotions more than their positive counterparts. So if you think about normal— forget markets for a second— if you think about normal human emotion, we react much more sharply to negative things than positive things. So corporations know of this type of human fault, if you like, in terms of our imbalance of emotional reaction. And so if you are a listed company, what you want to do is mitigate then any type of negative reaction in your share price. So if you have a negative story, like Elon Musk knowing that there's high anticipation for a battery date unveiling of information on his and he knows that that can't live up to the hype. So what does he do? He comes out the day before and he drops in then the precursor to the main event, which means when the main event occurs, we're already aware of a large portion of the information. And so as a net result, you see a much more, I guess, rational reaction when he brings it up ahead of time. And this offsets sets then a shock System 1, System 2 type reaction that can consequently see a violent sell-off in, in a company's shares. Big banks are notorious at doing this. Big banks who have faced obviously massive multi-billion dollar litigation fees in the post-financial crisis era, they would always come out ahead of their earnings report, kind of clear the deck. Yes, we're going to take a $2 billion charge because of FX manipulation speculation, and then the quarterly earnings come out and the stock price actually rises. Apple is notorious for this type of— I don't want to call it manipulation, but it is almost that. It's this kind of management, if you like, of the human investor, which ultimately is the dictator of the value of that share price. So yeah, I just wanted to give it a context to this. I thought it was another kind of example of Elon Musk's kind of one of his main skills, which I think is kind of like Trump in a way, which is an ability to use these types of platforms like Twitter to curate a narrative to his benefit in that sense. All right, moving on to the calendar. This is a quick summary, the top portion. Obviously Tuesday, what have we got today? So Bailey speaking in in a short while. You've got Fed's Evans speaking later as well at 3 o'clock London time. Evans discussing UK economy, monetary policy. And then Fed Chair Powell testifies to the House Financial Services Panel later on this afternoon. But we've already had those pre-release text comments, don't forget, last night. US data, there's nothing really coming out otherwise elsewhere of great significance in UK and Europe. So in the US, no 130s, but you've got existing home sales and the Richmond Fed Manufacturing Index. From a speaker's point of view, perhaps this is a little bit easier. This incorporates everyone. So these times here on this column are London. So Bailey 8:30, you've got ECB's Panetta speaking at 1:00, Fed's Evans non-voter at 3:00, ECB's Lane. Philip Lane, of course, was one of the most interesting speakers of late, who was one of the first to raise those concerns about the firmer euro. The chief economist, he Anthony speaking at 3 o'clock, Powell at 3:30, and then Barkin, non-voter albeit, is speaking at 5 PM. And then for any fixed income traders, you've got a Schatz auction this morning and a $52 billion in a 2-year note auction. All right, that is it. Um, any questions at all, just give me a shout in the comments. Absolutely happy as always to help. If you're watching this on YouTube, don't forget to subscribe to the channel as well. Really appreciate you helping be a part of the Amplify community online. Okay guys, have a good day. I'll speak to you tomorrow.