What To Expect From UK Budget Today From Chancellor Rishi Sunak

Okay, very good morning folks. It is Wednesday the 3rd of March, so going to give you the regular market briefing for today, recapping where we finished on Wall Street, some highlights from overnight in Asia where we had some quite soft Chinese data in the form of the service PMI number. Irrespective of that though, the Asian market mood generally lifted, reversing what we had was a lower close on Wall Street. We where once again the tech sector was an underperformer. Companies like Apple and Tesla were down around 2% and 4% respectively, weighing on the technology sector index within the S&P. But the general lift in sentiment going into European open from Asia's handover sees then equity index futures a little bit more positive. DAX up about 50 points, NASDAQ up 85, S&P up 17.25 at the moment. Elsewhere, T-notes very quiet in the overnight session. Gold relatively flat, just a loss of $3 at $1,730, comes with a largely unchanged dollar index to get things going this morning in the FX market, which again reflects relatively quiet trade here at the open. And then in the oil market, I can update you with the API inventories, obviously impacted from the great freeze we had just a week or so ago in North America and how that's impacted that data. But as you can see from the underlying price of, of crude, it hasn't really reacted too much because of that one-off factor. So yeah, overall this morning then, I'm not going to focus too much on the charts, going to look more so at the news because quite a few things to update you on. I'm going to start off with the general sentiment. I think it's important conversation what we've had for this week so far, uh, and a couple of conversations I've had with a couple of, uh, more inexperienced traders. There's that ability to be able to react to the current market conditions. I think often it's a little bit difficult if you haven't really accumulated the screen time to adapt and change and understand then that the variables are different. The market price across different instruments has moved and is now reflecting then a lot of what was creating over the past 2 weeks in the yield market, a lot of this kind of reopening trade idea and then consequent inflation and so on and so forth. And one of the interesting things we've seen really is this is looking at US 10-year yield over the last 2 and a half weeks. And as you can see, going back from the 15th all the way up to the end of last week, we saw an acceleration in US yields from around 1 sub-1.2 all the way up to a peak of around 1.54. This week though, this is the price that we've traded, uh, we've basically been locked between 1.4 and 1.44, 1.45. So comparatively then, we are just consolidating following what we, what we've seen, which is this yield acceleration story, which obviously was the trigger point for a lot of the market sensitivity and negativity. If you're looking at the prices of equities or, or gold and some of the precious metals from last week. So since then, some of those products just mentioned have been putting in the continued recovery. Now, as we were looking at with the longer dated picture on US 10s, on the yields, is that we accelerated so quickly over that short period of the last fortnight where we're at at the moment is technically quite interesting, as we were discussing yesterday, at the lower end of that range that we were trading through 2019. And as we were kind of saying on Monday, it's kind of a bit of a make or break moment now. Is it fair pricing for all things being equal that we've run up this quick and 1.45 kind of about reflects the current narrative? Or did we— would we break and then see a further push out? And at the moment the market seems content just to hold and consolidate for the time being. And that is helping assist then some of the general market stability that we're seeing at the moment. Of course, things can change, and there's plenty of catalysts coming up in US data from today going further forward into the rest of the week we need to keep an eye on. But I think that's quite a telling sign. And if we look at things like, just briefly, the US 10-year here, you can see, you know, after we had really significant downside pressure in T-notes going into Thursday last week. You can see a large portion of that move has been taken back, and we're trading almost 2 points off the initial lows that were seen during that kind of momentum when it all capitulated at the time. On the daily chart on the 10-year, it's also looking fairly interesting. There was that area around 134.15 which marks then support areas in beginning and end of March of 2020 when we were in the middle of the global kind of volatility on the initial onset of the pandemic. And we are back above that level after a brief hesitation that we saw at the beginning of the week. And so that technically, I'd say, is a little bit more bullish for price to hold at those levels as well. Um, just going to have a look then at some of the stories in play. I said overnight, generally the, the mood a little bit more optimistic than perhaps the, the close on Wall Street would have suggested in Asia. And it came irrespective of the fact that we did have some weak Chinese data. So the positivity was generally emanating from the fact that domestic press in China were citing analysts who suggest that the People's Bank of China could reduce the reserve requirement ratio for certain banks. this month was seen as a supporting factor, but the gains overall tempered then by the fact that Chinese service sector activity grew at its slowest pace in 10 months in February. Firms struggled with sluggish demand and high costs according to the Caixin report, prompting them to cut jobs. The employment subcomponent was actually in contraction at -47, or at 47.9. Um, so overall, China, I think if you're looking at that region at the moment, um, going into the European Open, China really is the focal point, or at least has been in recent weeks. Um, and in the overnight session, China was an outperformer, gains generally speaking up at around 1.5%, um, outperforming the rest of the region at the moment. So people look willing to look beyond the service figure for now, I guess it's still in expansionary territory fairly comfortably, irrespective of the job component, which is a little bit more worrying. And obviously China generally, the emphasis is on the manufacturing side. The other thing we've had that's helped restore a little bit of calm is just further reiteration from senior voters on the Federal Open Market Committee, the FOMC. So Fed's Brainard spoke last night and she said that it will take, quote, some time to meet conditions for economic progress. Laid out by the US Central Bank for reducing the pace of its massive asset purchase program. Separately, Mary Daly, also a voter, voter, said our most important virtue will be patience. We are not going to react at the first hint that inflation might have breached the Fed's 2% goal. So, you know, it's just so interesting. It's kind of like what Piers and I were talking about, commenting on in the Market Watch podcast that we put out on Friday. If you haven't yet had a look at that, just check it out on Apple or Spotify, Market Watch by Amplify Live. And we were talking about this idea of just letting the market have its kind of mini tantrums, as what we were seeing kind of to a certain degree last week, but just hold the line. And unless things get exponentially worse where you have to react, the market generally will, will restore some degree of calm, or at least that's the hope. And it's much better to let the market work these things out rather than being interventionist and looking to come in and soothe market concerns with every comment, because that ultimately leads you down a very negative loop path where the market will be looking for some kind of confirmation on every twist and turn that we see on a daily basis. And that's definitely not the route the Fed want to go down. So at the moment, the Fed continue to kind of bang the drum of, look, we're a long way from doing anything at this point. And that, that reaffirmation, if you like, I think is quite an important component at the moment. The other thing that's actually quite positive, a story that came out in the FT late last night, was that the Biden stimulus excuse me, the Biden and US plan on the coronavirus side. The US should be in line to have enough doses of the vaccine for every adult by the end of May, according to Biden. This comes after a pretty unprecedented move where Merck will manufacture doses of the Johnson Johnson COVID-19 vaccine. So they're going to work in combination with one another. And actually, that date of May, for context, would be about 2 months earlier than previously planned in order for the US to hit every adult. So as, as Biden's intentions were when he came in looking to accelerate the vaccination program, you know, this definitely is one of those more, you know, thankfully positive stories that are happening at the moment with COVID-19 generally decreasing on a nationwide level, at least. Fairly rapidly at the moment. United States on the stimulus front, um, I think this is still worth keeping a half an eye on. So it is due to arrive in the Senate, obviously having received passage in the House at the weekend. And having failed to secure any support though so far from Republican lawmakers, the White House then very much— Biden yesterday was on apparently on lots of different phone calls looking to kind of unified Democratic Party support, because even a single defection from within the ranks of the upper chamber of Congress could well then sink the bill's chances of going through, given how fine the margins are, of course, in the Senate, where it's effectively 50-50 and VP Kamala Harris has then the deciding vote. So although we have seen the likes of the Republicans push back against things like the minimum wage increase, which, which has been talked about quite a lot. I still think the passage of this bill looks somewhat inevitable, but any delay, I guess, probably more likely, or worse, disruption that could severely reshape it or see it not go through at all— low probability, of course— I think could have quite a meaningful impact on markets. If that low probability scenario played out, because the markets have effectively fully priced in this $1.9 trillion at this point. So I definitely think it's worth keeping an eye. I think the Senate are going to be meeting today, and obviously this will probably run on through the rest of this week. Be interested to see where— how the land lies by the time we get to the end of the week. We then had the oil inventory numbers last night, and actually, you know, it's quite an important thing here for context because the numbers are pretty whopping. Um, actually, they're missing a, a decimal point here. So, um, the actual crude build was 7.35 million. Gasoline was a draw of 9.993 million, the biggest draw ever. And distillates, the biggest draw since January 2003. But as it suggests here, don't forget that this is the first data set on the weekly inventories in the API where we get to see the impact and aftermath of the freeze that we saw across the US, in particular emphasis in Texas. So huge product draws suggest demand, but with refineries that were largely shut in— remember, Texas as a state was hard hit— inventories were crushed to meet what demand there was elsewhere. So yeah, I don't, I don't think the market's really assigning a great deal of priority to this, Despite the, the large numbers that we've seen contained within this report. From, from an oil point of view, obviously a lot of the attention being saturated this week on the upcoming OPEC meeting. According to Bloomberg, there's widespread view that the group, that the market can absorb additional barrels, according to people familiar with the deliberations. And that could put the group on track to implement the majority of the 1.5 million barrel per day output increase that's up for debate on Thursday. So that's the million Saudi putting back on, plus the 500K from OPEC. Um, just 24 hours or so now until the official meeting. So as I always say, you're probably going to see rumors and leaks start to intensify on the likes of various press publications and Twitter and so on. So worth just keeping an eye out. The reference point, the bar is set at 1.5 million. So if you were judging any type of immediate intraday market movement on any of this um, rumor-mongering, then really it's about how close is it to that 1.5. I would say that's very much the expectation. So anything away from that, um, higher or lower is what we'd be looking for, for any, um, a greater degree of price impact in the short term. Then you've got the UK budget that's coming out 12:30 later on today. Um, for any new traders The budget is a bit of a funny one because it generates obviously a lot of media interest. It is generally something that the public, the general public are interested in because it has meaningful impact on people's lives day to day. But from a market's point of view, very rarely is it that important beyond very nuanced moves within perhaps individual equity subsectors. And when I talk about that, things like the extension of stamp holiday on stamp duty has already boosted some of the homebuilder stocks. Estate agents, property websites like Rightmove, people like that have had a benefit on the back of that expectation that's already really baked in, further assisted by the government's plan to bring back things like 95% mortgages, something they moved away from, just given how more high risk they are, of course, in the back, in the wake of some of the other financial market turbulence we've had in the past. So that's helped homebuilders. UK retail and pub stocks have already been up this week on the idea that the government is going to provide grants to nearly 700,000 businesses. And we heard last night that Sunak is expected to extend the furlough scheme through till the end of September, paying 80% of wages for those in the program through to the end of June and then tailing that down for the final 3 months. So when it comes to things like the budget, it's very well telegraphed. As I've just said, if you were just looking at home builders or retail and pub-related stocks in the UK, for example, they've already been pre-positioning. The confirmation is inevitable here. It's always a very leaked event where the Chancellor will be speaking because he'll be wanting to I guess it's kind of damage control. If he is going to do anything, he just wants to kind of do the media rounds, get the market prepared so when he actually comes out, nothing's a real big surprise, particularly if he needs to talk about things like tax, for example. One of the big things on that issue of tax, the bigger deal perhaps to the domestic equity market would be a move to increase the rate of corporation tax. And on that point, Although according to Goldman Sachs, this isn't likely until life returns to some form of normality. They did say that bumping the tax up on companies by 6 percentage points, which is what's been mooted by the likes of the Sunday Times, I think it was at the weekend, to 25% to bring it in line with other countries, could spark a fall in UK stocks and shave off around 4% from the blue chip FTSE 100 stock stock index market capitalization. So again, I think Goldman's right though. I think there's a step approach to how the, the government want to, to deal with tax implications of paying for the phenomenal amount of government spending that's happening to support much-needed companies on the reopening of this economy over the course of the next few months. So I think perhaps that's a a thing for later on down the line, but I think that is coming as quite an interesting speed bump in time when, you know, you kind of have this delicious meal and then all of a sudden this big fat bill lands on your table and you're like, oof, okay, yep, we can pay that, but it's going to be painful. But I think that's an issue for later, not for now. So for the moment, I think, you know, all in summary as much as the budget is going to really dominate the news today, especially this afternoon in the mainstream media, I would say for the pound, the vaccination story is so much more important. Uh, if we're looking at the kind of short to medium term horizon, i.e., from really now out into the next 3 months at least, that's much more definitive than, than I'd say this is at this point in time. Just having a look then and wrapping things up at the day, what else have we got to, to look forward to? So you do have the various different eurozone and UK service PMI numbers, but these are final readings as you can clearly see here, so they're not expected to be market moving. So moving us on through the budget, then into the US session, we do get ADP. This often looked at as the precursor, of course, for the jobs report, which we'll get on on Friday, NFP. So look out for that at 1:15, and that will be alongside the US ISM Services PMI we'll get at 3 o'clock. Um, the ISM Services PMI at 60 could be quite interesting. That would actually bump us back up to the highest levels we've been since really late of 2018. It does come under after that particularly strong 3-year high we saw in the manufacturing reading on Monday. Um, so probably looking out for similar strength there. And then you've got the DOE Oil Inventories at 3:30 at the usual time, which might create a little bit of interest just given the outlying nature of some of the numbers that we had in the APIs last night. But as I said, I wouldn't be looking for any long-lasting impact from that, even with big figures, given the fact that there is an explainable situation for that occurrence and the close proximity of the OPEC meeting, which is ultimately, I think, a bigger, a bigger story for price at the moment. Then from a speaker's perspective, very much concentrated in the afternoon. So things really kick off at 1 o'clock with ECB's Panetta. But you've got ECB speaker Panetta and de Guindos at 1 and 3. You've got Bank of England's Tenreyro, who is speaking about negative interest rates. And you'll remember she was one of the most vocal proponents of negative rates a few months ago when it looked like a more viable tool that the UK could look to move to, that's been completely priced off the table now. Interested to see what she has to say. She's speaking at 4. Then you've got Fed voting members, both Bostic and Evans, speaking at 5 and 6 o'clock, um, late afternoon. So definitely quite a bumper speaker schedule to be aware of as well. But that's it. So gonna leave it there for the briefing. Gonna wish you guys a good day. If you're a part of the Amplify Live community, and I've got a brand new masterclass which we recorded with one of Australia's biggest bond traders, uh, for many years, Mark Gardner. He joined us on a call and it's been recorded. We're going to share that with the community at 6 PM London time tonight. He's got some really fascinating kind of insights to his, his 20-odd year career. And he talks about his biggest loss in a really open and honest way, and it's a, it's a pretty whopping loss, um, and but he's really honest about how that happened and lessons learned from that and practical ways that he's implemented since then to develop that kind of mental procedure to ensure that type of thing doesn't happen again. And he talks about trading the Asia PAC session, so some really great intel there for traders, new and old. So I'll leave it at that, let you guys crack on with the day. Any questions at all, just let me know in the Discord room or on the video if you're watching this later on, on YouTube. Take care.