What To Expect From The ECB Today

Okay, very good morning to you. It's Thursday the 4th of June. Hope everyone is doing well. As you can see, Christine Lagarde coming up, main focal point of the session ahead. So this morning, actually, from a news point of view, there's a couple of things for me to get you up to speed on, but Overall, for the market open, it is relatively quiet as market participants await that main event. Equity index futures down just a touch, comes after a little bit of fatigue perhaps in this recent run-up in global equities that we've had. So the DAX down about 40 points at the moment, the NASDAQ down 16.5, the S&P down 7.75. T-notes pretty flat overall, just a slight dip back toward unchanged as Europe has come in after being marginally elevated overnight. The Asia-Pacific session still trading sub-pivot in the futures market. And then gold still hovering close proximity to that 1,700 kind of psychological level. The chart here in the top right-hand corner, and as you can see, that in itself has provided a bit of short-term area of support to price, as you've seen in the Asia-Pacific session and late into the US session last night. In the FX markets, the dollar actually having a bit of a, bit of a fight back after, you know, generally trending lower for some time. So I'd say from a risk perspective or sentiment, things are fairly neutral this morning at the open. The DXY though, much of that bounce coming in overnight session. No real one singular catalyst behind it. I'd say that, as I said, we've been weakening for a while there, so a bit of a move back higher, perhaps not wildly unexpected. And so the major pairs lower this morning. EUR down about 30, CAD as well, after what has been a pretty decent run of late, just moving back down and trading around its S1 in the futures. So let's get stuck into things and let's talk about the ECB first, and then I'll run you through the rest of the morning's headlines. Starting off with— this is Lagarde. And what are we looking out for today? Well, first of all, let's just set the scene for the general broader expectations here for what's going to happen today. And understanding how to trade any news-driven event, it's super important to understand how the market is positioned in regard to reflecting then the base market expectation. So in this case, it's very much anticipated that the ECB are gonna increase their PEPP, their Pandemic Emergency Purchase Program. So this is their new kind of program that they brought about in order to again add another kind of monetary stimulus to support the economy going through this tough period of the pandemic. And so Expectations then do reflect this. So one of the things here, if I just go through these 4 charts starting with Fig 1 on the top left, and as you can see here, you've got the sort of 2 lines here. I know it's a bit small, so let me talk you through it. The orange line is euro-dollar in terms of the currency, and then you've got the 10-year BTP Bund spread. So for any of those new to markets, the BTP being the Italian bond, and you're looking at the Italian bond yield in reflection to the base German core counterpart. So whenever people in Europe generally talk about yield spreads and tracking of them, you're looking at Germany as the benchmark and then looking to base then Spanish bonds or Italian bonds, in this case BTPs, against then that German bond. And what we're looking at here is if, let's say, there's sensitivity, there's some, let's say, an ECB bond buying program that's going to be more beneficial for Italy, then then you should see movement in the Italian yield more so than the German one, and this spread then will widen or narrow depending accordingly. In more simple terms, when people are nervous, generally speaking, the country then— their yields tend to rise as a reflection of the fact that they become more of a risk. So they have to offer then for foreign people to buy, purchase their debt, a higher yield. And so by consequence then, the yield tends spread in terms of, uh, more riskier times, and then the spread tightens in the opposite. And what we're seeing here then is from a spread point of view, you can see that the BTP-Bund spread has been tightening. So it was wider, you know, during the, the depths of the March crisis. The spread BTP over Bunds was about 2.7, and it's now narrowed to about 1.8. In step with that. So you can see the BTP Bund spread has been narrowing in step with the EURUSD incline. So as EURUSD has been strengthening, this has come as there's been a decline in eurozone fiscal concerns. And we've recently seen, of course, there's been finally a coordinated effort on behalf of the eurozone in that economic recovery fund of €750 billion. And now the ECB Restarting QE, the PEPP is going to get a top-up today. And so all of these things, normal times, monetary easing in the form of doing more quantitative easing would typically weaken the euro. But people are looking beyond that. They're looking at the combination of almost mythical levels of fiscal and monetary stimulus is going to assist the economic recovery. And so rather than the traditional way of viewing these policy tools impacts on the local currency, actually people are more focused on the ability to stave off a real disastrous economic period on the post-pandemic era. And the fact that they've stepped up on both sides, fiscal and monetary, the euro's liked it so far. So the other thing then is, well, these two other Graphs, so Fig 2 and Fig 3, EURUSD trading rich versus short-term fair value, and also EURUSD speculative longs have risen in the past month. So, you know, some of these things here— if what I'm saying is, is the EURUSD is moving higher underpinned by the notion that authorities are taking necessary steps to really use their firepower to help stimulate the economy, well that's priced in. And if the ECB were to fail to deliver this top-up of €500 billion later today, given the way that the market is positioned in terms of its speculative longs, in terms of its richness, that is trading in terms of the recent price movement— I mean, if you look at EURUSD here on a Daily, if I can bring it back up. So looking at the EURUSD currency pair, you can see it's really through late May, and this is only really a week's worth of price activity. We've, we've pretty much done 2, 2 points, and we're right back up in EURUSD, up to the point of trading to levels we've not really seen since the initiation of the sell-off when the market started to really price in the pandemic and people Now, this episode here of euro-dollar weakness was people flocking to the reserve global currency, i.e., the dollar, when the equity market was getting hammered on the back of the pricing in of the initial acceleration of the, the virus spreading outside of China, going into mainland Europe and into United States and beyond. So now we've taken back pretty much fully that move, trading back towards heading We're on 112 handle at the moment, getting up in toward the 113 mark. So what I'm trying to say here is the markets are heavily priced for the ECB to deliver today. So one big shock, of course, could come from a trading perspective, could be, well, what if they don't deliver? I think that that would be a complete misjudgment and communication on behalf of the ECB if that were to materialize. So I definitely do not see that happening. However, just given then that probably that's a shared view by markets, if it did indeed happen and they did not increase the PEPP today by the anticipated €500 billion, you would get a big move in markets in that respect. So equities would— European equities would probably decline substantially. The Euro in this sense? Well, if we're following through the logic that I've been saying, there's room for it to drop quite considerably without then, you know, kind of having delivered on their promise, so to speak. One of the cool things that ING do, the Dutch bank, which is incredibly useful because trading a news-driven event is difficult enough, but trading a monetary policy event is even more complex. Particularly now when you think about the variety of different tools of which central banks are deploying at the moment. I think I, I counted them the other day. There's a good graphic in the FT at the Fed, and there's something like, I don't know, 14 different things now that you really need to monitor if you to understand their, their policy impact, um, to the, to the T. But What basically ING do is simplify this, and I think that's the most important thing for a trader. You know, we're— even myself, look, I'm not here to be an economist and explain the depths of macroeconomics. I'm here to help you guys trade, and that's it. That's the bottom line, and my objective is to deliver that. And the easiest way to do that is to take a complex scenario and break it down into a much more digestible and importantly actionable kind of game plan. And so when I— when we go into something like the ECB, this is a great way of how to, to break that up in terms of your preparation, your scenario building, as I, as I refer to it. Because whenever you go into a news-driven event, those who are most successful are those who take the time to develop then a variety of different scenarios and accompanying strategies that they can then automatically implement depending on the outcome as it unfolds. A good macro headline news trader absolutely is not thinking on a whim and just reacting to things as they're happening. The whole point is that they're anticipating things. Everything is rehearsed and pre-planned, and then it becomes just a pure case of execution. And so here, what's easy to understand about this then is they've, they've broken up the ECB's kind of communication into 4 different distinct areas: inflation outlook, the growth outlook, the interest rate and QE kind of decision forward guidance, and then this PEPP program which we've been talking about. Now, the important thing here when it comes to understanding the nuances of what is it that central banks are trying to tell us, this kind of infamous forward guidance This is basically trying to interpret then very subtle and small changes in the language in which they use. So your first baseline is, well, what is the language that they're using at present? What is their current statement? What are their current key phrases used to outline, let's say, their outlook on inflation, for example? So they have this at the top in orange. So the current stance for, for inflation, for example, inflation outlook surrounded by high uncertainty. So as you would imagine, in the last ECB meeting, we were right in the midst of this, this global pandemic, and, and rightly so, they were sounding some degree of caution and uncertainty. So here then, rather than go through each one, just explaining how this matrix would work is you're looking at dovish to hawkish scenarios, uh, and what they have here then is the 4 categories of policy, the dovish to hawkish scenarios in terms of the change in potential language to reflect that, and then the subsequent impact that that could see on the euro-dollar currency pair. Now look, this isn't an exact science. You wouldn't pre-program an algorithm to just say, right, if that word and sentence structure changes to, um, A, then we're going to execute to point B. It doesn't quite work as simplistic and black and white as that, but it acts as a great reference point as to then building out then your, your, your kind of vision visualization of what could happen. That's so important for your psychology of managing what is quite an intense volatile period when the initial event starts to happen and the press conference gets underway. You know, very important that you remain in control. And generally, how the human brains function— well, the more equipped they are of understanding what it is that's going on and what the potential outcomes can be, the more in control, the more confident they feel about the decision-making process. So here then, um, when it comes to the going through the baseline case— and I, I do agree with, with what they're suggesting— so let's just run through that center one. As the, the main one to look out for. So for the inflation outlook, they might say that the recent data suggests the CPI pickup will take longer. So what they're saying is actually, you know, the fact that purchasing of goods has diminished considerably given the stringency of the lockdowns felt in the eurozone, well then demand for goods is going to drop sharply. Many believe that we could be in for future inflation, of course, just given the increase in the money supply and QE, but that's not going to happen anytime soon. So, okay, yep, tick, agree with that. Growth outlook: recent data suggests significant slowdown in activity. So here they previously said the duration of recession and recovery are difficult to predict. So they're basically standing off and saying nothing really in their current status. Do they change that and become a little bit more definitive? There is going to be a significant downturn according to recent data. So again, If you think about the— this from a, um, structural point of view in their assessment of the economy, they're basically saying inflation is going to be lower, growth is going to be lower. Now, why this is important is because core to the meeting today is the newest set of, uh, projections that are going to come out from the ECB. Um, now the last time the staff projections came out was in March and they predicted GDP growth to come in at +0.8% this year. So that is wildly out of date, um, when that was issued. The April meeting, um, the projections prepared 3 different scenarios: real GDP dropping by 5%, 8%, and 12%. Um, so that would be under mild, medium, and severe scenarios for 2020. Now, if you remember, Lagarde and ECB officials, they've said the mild scenario has become highly unrealistic, and next week's forecast could be somewhere between the medium and severe scenario. If you remember the briefing, I think on Monday, Deguindos was speaking, who's the vice president of the ECB, and he said basically GDP could be between 8 to 12% negative for 2020. So that's where those numbers are coming from. That would be classification then of the medium to severe scenario. So again, a lot of that is expected and, and will be priced in, but alongside will they or won't they with the PEPP top-up, how long are they going to extend that, is there any tweaks in towards the parameters of the purchasing, and things like buying of fallen angels, you these types of things. The actual parameters around their, their debt purchases, as well as the forward guidance and the projections, are the things you need to watch today. The interest rate— not anticipating any change to the forward guidance. I think that's rightly so. The deposit rate, obviously sitting at a -0.5% at the moment, and I don't really see them having to tweak that anytime soon. This isn't really a talking point on the rate side. It's very much more on this pandemic purchasing program to be updated, increased, and extended is the bottom line. So any deviation away from this would reflect then a more hawkish or dovish scenario. But I'll leave it at that. I've shared this into the chat rooms, and so you'll be able to go through it, print it out, have it on your desk as your crib sheet as you're going through. But I'll be on to cover that later. All right, running through a few other headlines. What else have we got? Merkel seals $146 billion deal to pull Germany out of the crisis. What does that actually equate to in euros? €130 billion. So this was something I covered on Tuesday, I believe, is when Merkel was talking with her various political parties trying to find some kind of compromise. The talk then was of a potential of $80 to $100 billion, and it's come out as agreement of $130 billion. So in fact, over delivery of 30% on the top end of the expectations on the ranges. So, um, yeah, has the market reacted to this? No. Should it have done? Well, it is more than anticipated, but I guess if anything, it's kind of the market's becoming a little bit, I guess, fatigued in a way, in the sense that, you know, these massive fiscal packages have become quite the norm, I guess. And so I don't think it was in doubt that Germany were not going to deliver something. So all in all, hasn't really impacted too much. In terms of the, the structure of the virus recovery that they're talking about in this new stimulus plan, the main kind of headline feature is value-added tax is to be cut to 16% from 19% through the end of 2020 at the cost of €20 billion, and they're going to do some bridge financing for small mid-sized businesses to as much as €25 billion, kind of the most kind of meaty part of that proposal. Elsewhere, oil. Oil had such a volatile day yesterday, really choppy. We traded, you know, the best part of a $2 range, but it was, you know, kind of up and down. And for anyone again new to markets, you have to understand that an OPEC meeting which is looming creates the most volatile situation. So not only are you trading a product, let's say like WTI crude futures, which, you know, by definition its characteristics are incredibly volatile comparative to, say, the fixed income market or even the FX market. So the actual product in itself is already quite sensitive to headline noise. But then what tends to happen ahead of a meeting is OPEC are the opposite. If you think about the Federal Reserve, So ahead of their meeting, you— we go into a blackout period where no Federal Reserve official comments on policy in order to avert any types of leaks or rumors, unnecessary moves in the market. So that's the most prudent and cautious approach. Of course, OPEC are the absolute opposite. They will be firing out comments left, right, and center, and the frequency of those comments just picks up rapidly as we get closer towards an actual meeting. I think, I guess what you need to understand is when you talk about Federal Reserve members, let's say on the board of the FOMC, even though they might have a diverse opinion on the best foot forward for policy, they all are employees of, let's say, the Federal Reserve, and they're all working to one shared common goal, an objective. It's the opposite with oil. If you think about it, underlying these relationships is a competing marketplace for, for the share of the sale and distribution of crude oil, which we know means a lot of money. And specifically, a lot of these oil-producing nations are highly geared, of course, toward the generation of cash in order to finance their government spending and so on. So Here then lies a big problem, because Saudi Arabia, Iran, Iraq— if we're talking OPEC+, Russia— all of these countries generally have their own agendas. They have their own individual slightly different situations that they need to manage. And, you know, from a geopolitical point of view, many— it crosses boundaries into much more complicated matters like religion, for example, when it comes to say Saudi and Iran. So the ability for them to actually coordinate policies is incredibly difficult. And this leads then to a lot of sensitivity in the price of oil as we go into these meetings, because Saudi will say one thing, Russia will say something else, then Iran will say something different. And that can lead to lots of whipsaw price movements. So from a trader's point of view, the only advice I can say to you is you need to reevaluate the kind of longevity of the types of trades, the trade duration, I guess is what I'm saying. When you do get a kind of snap comment and the market moves quite quickly, you want to be managing that position in a fairly proactive nature, looking to scale out, book in the profit quite early, not wanting to sit in there thinking, right, that's it, this price is going $1 or $2, probably highly unlikely, because what you tend to see is big reversals in the market. Because another comment comes out and someone says something completely different. That is the nature of OPEC rhetoric. So they're the only things I can say really as advice going into this. I do expect more, more volatility. At the moment they can't even decide when they're going to hold this meeting, never mind what exactly it is they're going to do. But the general consensus at the moment is that Saudi Arabia and Russia apparently have reached a preliminary deal to extend output curbs for an extra month. There were obviously some issues last week where Russia was suggesting that perhaps it wouldn't, but apparently a preliminary deal has been reached, but it's conditional on other members making deeper cuts in the months ahead to make up for non-compliance. So what this means is every single country basically produces at various different rates, And in order to have an OPEC+ conditional deal, what they're saying is, is that every individual country has its fixed quota. But then these countries, what we tend to see is Saudi, if that's the level which they need to cut production, Saudis tend to overdeliver in order to pick up for the slack for other countries who fall short. For example, Iraq. Iraq has been probably the number one culprit for being the least compliant. If you think about a country like Iraq, obviously ever since the Iraq War, the country's been absolutely decimated, um, economically. It's been very difficult for them, and given their dependency on oil, they're incredibly reluctant to be turning off the tap because otherwise that's their lifeblood in order to keep the economy, economy running. What has happened in previous times is that Saudi just steps up and then just ends up being overly compliant to pick up the slack of these other members. If you think about smaller members, these could be like Libya, Angola, the Congo, for example. They too, given their, their production rates are so small, Saudi only needs to, you know, make a very slight change and it picks up the slack. But what they're— that's a bad precedent to set. Because if you can continue bailing out these other smaller nations, or even the big ones like Iraq, who actually is one of the big guys, then that's going to be troublesome further on down the line. Because all the more that they're over-compliant, Saudi Arabia is selling less barrels of oil, of course. So herein then lies the problem. Can they get these other members to be compliant? I think if they're going to go down that path, they're going to have to wait quite a while And if then it's conditional that not until they're all compliant will they then look to extend, I, I'd see that as a negative actually for prices. I think that's quite a difficult ask to get that over the line. So I see this heading one way, which is Saudi Arabia will put more pressure on Russia to join them into, look, let's just get this extended and get this done. But Russia will be quite reluctant to agree to that. And so yeah, a deal is not a deal until literally, um, we get something more concrete at really the point of the OPEC meeting. So yeah, lots more movement to come, I'm sure, with oil. And given the fact that we've just been almost one direction moving higher and higher in oil, it definitely is susceptible for a bit of a pullback in that respect. All right, other things. The UK is on collision course with China. So this is kind of latest with the whole trade war situation. Johnson's government's criticized Beijing's planned imposition of security law on the obviously former British territory of Hong Kong. They're taking steps to exclude the Chinese firm Huawei from its fifth-generation mobile networks by lining up potential replacements, uh, these replacements being potentially Japan's NEC or Korea's Samsung. So this is just following on from the the general Western response to what we've had with the trade war and the security change law of Hong Kong. The US yesterday said they were barring Chinese airlines in retaliation for ignoring, ignoring the request for American carriers to resume flights to China that have been suspended due to the pandemic as well. So the trade, trade war still rattles on. Um, yeah, hard to see really what comes next. It almost feels like they've, they've fired a couple of bullets here, and perhaps there's a little bit of time now for the dust to settle before we see the next kind of moves. So definitely I remain vigilant for anything from Trump, but of, you know, I still stand by what I said on Monday, and I think it has been the case so far, is that Trump's been far more distracted by what's going on with the these nationwide riots with the death of George Floyd, of course. And so he still needs to fend that off politically. And so the trade war, in, in a sense, takes a bit of a second place for the time being. But obviously anything can happen anytime, and trade war still remains a key kind of tail risk. But for today, I don't really anticipate too much at this point. Perhaps something then, you usual kind of last messaging going over the weekend you might see from Trump. But today I think we'll be more focused on the ECB, for all things being equal. In terms of the calendar then, just to round things off, other than the ECB, it is fairly quiet. You've got initial jobless claims continuing to see a further kind of decline. Still obviously very high jobless claims expected at 1.8 million. But remember, we were up at 6.6 million back in March, and so we've had this steady decrease. That then leading us into non-farm, which of course we'll talk about more tomorrow. There's been some slight tweak to some analysts' expectations on that, just given the strength of the ADP, which again, I mean, a number with a circle loss of 2.5 million jobs is definitely not good, but it's definitely nowhere near as bad as what some of the market consensus was indicating going into that figure. So that's it, I'm not going to talk any further. So any questions, of course, just let me know, happy to help. Please feel free to like and subscribe, uh, to the video and the Amplify Trading YouTube channel, and I will see you guys tomorrow. Thanks very much.