What To Watch In Markets This Week: 7th - 11th Sept 2020

Okay, very good morning to you. Hope you had a great weekend. It is Monday the 7th of September. Before I begin, if you're new to the channel, please don't forget to like and subscribe. We've got videos coming from me every morning and the rest of the team as well over the weekend on different subjects, all related to markets. But yeah, getting stuck into what have we got for this week and Before I delve into the calendar, obviously a reminder, it's— US markets are closed today for Labor Day, so we could be expecting generally on these types of days lower volume, particularly as we go into the latter part of the day if you're based in the UK and Europe. So this afternoon could be quite quiet. However, one of the things is, if I just jump over to here, is obviously markets are still a little bit— it almost feels somewhat apprehensive following the stock decline we had led by US indices and the rotation out of, in particular, some of these big large mega-cap tech names in the US. And so we continue to keep an eye on this. The, the sentiment then somewhat still impeded, I feel, by the, that sell-off. And it was the worst week for the NASDAQ since March when we had that initial bout of downside volatility when the initial outbreak of the epidemic was starting with coronavirus. History does tell us I was looking at a couple of data samples from a macro fund in the US, and they were talking about some backtesting of data, and that historically shows that steep sell-offs often take at least 3 days to basically wash out the panic sellers. So those who might be just bailing on their positions, particularly in the retail market. And on that front, what could well accelerate that type of mentality is something you've probably read about quite a lot at the weekend. which is about stock options. Uh, the reason why it's gaining quite a bit of coverage, um, at the weekend is because SoftBank Group, the Japanese conglomerate, uh, has apparently bought extremely large positions in contracts tied to these mega-cap tech shares, somewhat in step from what we've been seeing with this kind of legion of retail traders, uh, in the US via apps like Robinhood and, and so on. This is just a graphic looking at the S&P 500 on the black line, and then looking at small trader call buyers to open premium spent. And you can see here, this just phenomenal rise that we've had of late. If anything, the FANG group of companies— so your Facebook, Amazons, Apples, Netflix, your Googles or Alphabets— they've surged at one of the fastest clips ever with the lion's share of action being in these bullish calls. Um, if you're new to all of this, what this basically means, to make it as simple as possible, if you spend some money on bullish calls on shares you own in hopes of forcing the sellers to purchase the same stock as a hedge, an ensuing feedback loop drives everything higher and might well explain why you had that phenomenal run in some of these in particular focused tech names. So the idea here then is And the reason why I think it's a little early to really call the shots, I think, in regards to trying to just get in long right now, or will we see another spillover today. And this sort of thing can happen if markets volumes are down and it's fairly illiquid situation. Perhaps we get another run. Historically, as I said, the price patterns do typically tend to show a 3-day period with sizable kind of drawdowns in the market. But the idea being It will— these kind of Robinhood, more retail-focused investors get a bit spooked then. A lot of them perhaps just new to the game and benefiting from the big surge and push that we had, obviously, with the continuation of that, what, 11 out of 13 kind of bullish days we had before the, uh, the move lower we had Thursday, Friday last week. And do they bail? And does that exacerbate then a further contraction in this, this equity market in the short term? Longer term, I still feel that the market will find a degree of support lower down. But on that note, let's just have a quick look at where those potential levels could be. But I think for the moment today, I'm still a little bit more on the fence to how this might play out at this point. So I'd rather not participate, I guess, is, uh, my kind of view for the time being. But looking on the daily continuation here at the NASDAQ. This is obviously that chart we've had up a couple of times, and just looking, incorporating the sell-off that we've had yesterday, and the NASDAQ future is down about another 150 this morning. So finding a little bit of near-term support and a key area technically around here, 11,283. Now encompass the previous push to the all-time high and an area of multiple resistance and support on the push high we had on the 20th to then accelerate the push higher. We've already broken through that key 21 DMA, of course, at the end of last week, so we trained firmly but below there at the moment. The next kind of area or zone that I'd be keeping an eye on would be around here, which does then, uh, in the middle mark the 11,000 level. So 11,058 to 10,939, which was this area of price activity through July and the first half of August. When the market had responded to a couple of times. So I think perhaps there a little bit more room, uh, to go in the NASDAQ. But as I've said before, I still feel like more bullish over the medium term on the prospects of where that market goes. In the S&P, again, just going back to that kind of annotated chart we've had a number of times— let me just remove my, my camera feed so you can see everything more clearly. So the rotation out of some of these mega tech names, but overall the market as a whole under some pressure, puts us back down at a very key level. That 3,400 does mark the prior top that we had prior to the, the epidemic starting. So this is pre-pandemic phase of when we had the outbreak kind of, and outside of mainland China. And so here I think we're quite a good level. If we push any further down, 3,357 I think is the next level that I'd be keeping an eye on. That's close towards the extremity of that low that we printed at the end of last week. And then any further push lower down, probably around the 3284, incorporating the peak before some renewed China tensions started to come in around late July, which would also coincide pretty close proximity to this DMA that we have here. Which is the 50. So yeah, definitely quite interested to see how things play out today. Uh, it could be quite quiet, but you know, just because it's a holiday and the US aren't in the market, that can often make things a little more volatile to some degree. As I said, just given the, the lack of participation, uh, so a couple of big orders go through and things can get, um, exacerbated by those conditions. But otherwise, elsewhere We're going to walk you through a couple of other things that are going on at the moment. I just turned my camera back on. We're going to talk about the ECB, going to talk about Brexit, and we're going to talk about a few other calendar highlights like US CPI inflation data coming at the end of the week as well. So I'm going to push on. Let's go to what happened overnight in Asia. Talking about China exports kept expanding in August while imports fell. So China exports were the third highest on record, in fact. As trade has continued to rebound in the country. Exports rose 9.5% against expectations of 7.5%. The trade surplus with the US was $34.2 billion. That's the highest since November of 2018. And officials have agreed to create conditions to push the Phase 1 deal forward, according to the China Ministry of Commerce. So all in all, a fairly positive result here, and certainly flies in somewhat contrast to the rhetoric we've been hearing, the likes of particularly Donald Trump, which as we've discussed many times before will be trying to frame China in a certain perspective for his benefit for the upcoming US election. But one of the things I saw as well, just on topic with this, uh, this is a look at Goldman Sachs. They have basically what they call a US-China relations barometer which is calculated based on 15 specific equity proxies in areas of trade, tech, capital markets, and geopolitics to gauge equity implied US-China relations. And basically this number last week fell from 90 to the new figure of 75. So indicative then that trade relations generally— it's not that they're getting better, they just haven't got worse perhaps and have come off some of the most elevated levels that we have seen of tensions. If you remember with the whole tech side of things, the concert situation, things have died down, uh, quite a bit. And underlying this, more stabilization in China and therefore more follow-through of commitment to adhere to the deal and purchase and import of US goods. So at the moment, the trade war side of things I think is to monitor, but still relatively calm at this point in time. Um, just moving on then, looking at Brexit. Quite a lot of headlines about this this morning. And if you look in the currency pairs, Cable is underperforming, and we're back down to a 1.32 handle, which is finding some support around its relative S1 in the daily pivots in the futures market. So down 85 is underperforming EURUSD, which is down just 20. A couple of things to get you up to speed on, actually, uh, quite a few headlines of course coming ahead of the 8th round of Brexit negotiations taking place. And what's happened here is Boris Johnson has come out over the weekend, and apparently today he will tell the European Union that he is willing to walk away rather than compromise in what he sees as the core principles of Brexit. He set a deadline of the 15th of October. As I'm going to discuss then, I'll give you my take on all of this, but let me just give, give you the details first. So his government is preparing a to publish a new legislation designed to dilute the legal force of the divorce deal he signed with the EU this year if outstanding issues cannot be resolved on the thorny issues of Northern Ireland. So this is called the Internal Market Bill, and it's expected to be published on Wednesday. So this is going to make the EU particularly, um, negative going into these talks. Britain have said, well, this is only being done as a contingency backup They still want to try and get a deal, but the fact that they're doing that and being so public about it, obviously this is very, um, political tactics being deployed in order to just show their real appetite for walking away from the deal to kind of force Europe to the table. And obviously this is going to mean that both parties are going to be a far distance apart as they discuss things this week. A couple of things on the background, and while we do that, I'll leave up here the kind of schedule of the timeline on Tuesday, Wednesday, and Thursday when these trade talks are happening. This is the agenda and the allotted time frames. So it could be useful if you are really being prudent, you could look at this timetable and overlay it then thinking about, well, there's some of the key areas here of fisheries, for example, which they've got roughly about 6 to 8 hours worth of dialogue over the next few days to talk about, and that is one of the main stumbling blocks. So what are the timings of that, and when could you then subsequently expect some potential rumors, tweets from journalists, these types of things that could be disruptive for the pound? So that could be quite an interesting way to approach it if you were going to be super proactive on that front. A couple of things though, what, what are the sticking points and why? So on fisheries Of course is the main one. The EU is seeking to keep the access its fishermen currently have to the UK waters to protect jobs and coastal communities, while Britain wants reduced access for EU boats and to make it conditional on regular negotiations. Other areas then are things like a level playing field. A third area of disagreement is what's described as the governance of any future agreement. You know, one of the main things here— really two— for one, fishing makes up only a tiny part of the economy on both sides. The reason why it's such a major thing here is that it was a big part of the Leave campaign, and in order to fulfill that, particularly the political pressure that Boris Johnson has been under given the series of U-turns over the summer which has seen things like the opinion poll polling last week show that both Conservatives and Labour now are absolutely square in public opinion, comparative to the some 25 percentage point gains the Tories had when obviously Boris romped to victory in the election back at Christmas last year. If no trade agreement is completed by the end of the year, the UK won't have any formal deal with the EU, and this is obviously the growing risk here of this kind of no deal situation. And to give you an idea, uh, no— what, what would be the consequence of no deal in terms of actual trade activity? Well, um, Britain and the UK trade accounted for around 43% of UK exports in 2019. So almost half of all exports from the UK goes to Europe, and similarly, about 51% of UK imports come from Europe. So hence the reason why it's really critical that a deal gets done of some degree. And obviously in the context of the UK economic situation of late, which is we're in a deep, heavy contraction, the recessionary environment post-pandemic, and also, you know, we have other kind of tangible risks facing the economy at the moment as well, such as the lapse of furlough and these other fiscal measures which are due to conclude in the coming weeks and months. The other thing here, just layering up more, um, I, I guess, uh, question marks over the, the popularity of the government at the moment, is the UK reported just shy of 3,000 new coronavirus cases on Sunday. That's a 64% jump from the previous day and the highest level of coronavirus new cases since the end of May. This all comes as well as you'll remember seeing Johnson last week. I think Dominic Raab was doing the press rounds on, on Sunday, and they're all trying to really push forward this get people back to work mentality because of the amount of productivity in, in economic sense that's lost, not by people being productive from working at home, that's not the case, but by going to work, you're obviously utilizing public transport You're buying your sandwich from Pret à Manger, for example, which have had to cut thousands of jobs lately. So all of these other services around then what, what consumers generally use whilst being active and traveling to the workplace are not happening at the moment. So the government's push to do that comes at this big risk, which is seasonally coming to this point where coronavirus is one of those other major headaches that the government needs to deal with. and we've seen one of the biggest leaps in numbers, um, since May 22nd, actually, at the weekend. So something to watch as well. Uh, with the end of furloughs, as I mentioned before, being the other, um, factor of threat for the UK economic recovery, uh, 30% of manufacturing, uh, companies, they were surveyed, and they said that they plan to cut jobs in the next 6 months. And so 62% of the 226 employers that were surveyed are pushing and want to request an extension to furlough. And this is something that Piers and I were talking about when we did our live session on NFP. Does Rishi Sunak have any other choice given the likes of his European counterparts in France and Germany, for example, have extended a lot of these programs out into 2021? Will he inevitably have to follow suit? But that in itself is going to be divisive internally given his need to be more fiscally prudent, given the large quantities of debt have been accumulated through a number of the government actions over the last couple of months, comparative to then stopping a short-term tsunami of unemployment figures hitting in the UK when it comes to the end of October of this year. So yeah, much to watch when it comes to, um, the UK. The one thing I would say is, um, let me just bring up— I did a tweet about this. There was a comment out of UBS, and I absolutely agree with their, their sentiment and their mentality, which was that basically, uh, not this one here, with the 8th round of Brexit negotiations happening this week, what's my overall take? Well, the UK again threatening that they'll walk away rather than compromise, saying that this is a moment of reckoning. This is just classic, I think, management of public perception to fulfill then the mandate of why this government was elected, which was to deliver Brexit. And so I seriously don't think that they would walk away without a deal. I think a lot of this talk about this internal market bill, these are all things to try and force the hand of Europe to come to the table table. Do I expect any type of progress between the two parties this week? No, I don't. I think there's more than enough time. We've got more than a month before this, uh, self-imposed deadline of October 15th that Boris is going to outlay today. I think between now and then you might see some movement, but even then, I think perhaps it'll even go beyond that point. The idea being that even though this does need to get ratified across Europe any type of deal. I think that there's, as we've seen before, there's always more time that can be bought if needed, and that's what we've seen throughout this whole Brexit saga. But that doesn't mean though that as we go further down that road that the overall weighted impact of the implication and the necessity to have to price in a no deal does not at some point start to weigh more firmly on the pound, which I think it probably will. All right, the other thing of course that people are looking at this week is the ECB. This is probably one of the major, or the major event of the, the week. This is a quick look at EURUSD, and obviously going back to May 18th when the Franco-German proposal for the EU recovery fund came out, the ECB ramped up its stimulus. Then in July 21st, the EU approved their recovery fund. Now this has been that really strong overdelivery of stimulus that we've had in the eurozone, whether it be from the ECB or in the form of national government response or a unified response with the European Recovery Fund. And that really has rocketed the euro higher. Now, one of the things then that has led to is that apparently, according to reports in the FT and followed by a number of comments from various different ECB members, particularly Philip Lane, the chief economist of the ECB, who said last week that the euro-dollar rate does matter. And that is the first kind of stepstone of verbal intervention on behalf of the ECB to kind of control then the runaway strength that we've had of that currency, which then could impede if further strengthens the speed of the economic recovery in the euro area. And so a lot of focus on that, no doubt, when it comes to the ECB. Christine Lagarde, although on balance We're not expecting any real action from the ECB this week, but perhaps more rather a readiness to continue to act as and when needed, noting that incoming data will provide a better guide as for future potential policy action. So it's kind of really toeing the line, steering the normal course. But that doesn't mean then that most people are of the expectation that at some point the ECB are going to deliver more Now, what form could this take? Well, as much as this could be a wait-and-see meeting, expectations are growing that the ECB are going to have to start to expand their pandemic emergency purchase program, the PEPP. And there was a survey out of Bloomberg at the end of last week, which I'm sure you saw, but it said that most respondents— so this would be major bank economists— are forecasting PEPP increase of €350 billion in December of this year, and then it will be extended going out from its due to finish in June all the way out to then the end December of 2021. So at the moment, what does that look like? Well, that would then be another top-up on what is now, what, €1.35 trillion worth of support on these measures for the ECB. So, you know, huge monetary responses here Uh, and then in terms of the other thing to look out for from, from the ECB this week is they get a fresh set of projections. So are they going to alter anything on their inflation and GDP? Well, economists predict the ECB to keep the outlook largely unchanged, but this will be another key area. And then the third area that I'd be looking at when it comes to the ECB is really following on from the Fed announcement on average inflation targeting. Are the ECB thinking of anything similar? What's their opinion on what the Fed have done, uh, and whether or not that would give any hint towards the ECB thinking of doing something themselves in future? That would be a very smaller point though to the other things at play. The biggest subject matter here I think is going to be some more color about the euro and then potential timing around and what would be further policy hints. Now, one thing I want to talk about here on those two points then, firstly, is the euro. And I saw this really excellent chart that was shared, and it was talking about euro spec longs have built up significantly over the summer. And remember, that is a byproduct then of all of the fundamental catalysts that we've had that have been euro positive. And all the time, the Fed have become even more accommodative with their monetary policy. So that's forced the euro speculators into long positions to take advantage of that appreciation of the pair. But what's happened then is that given the positioning is quite stretched to be long, then the euro is quite vulnerable to what we call jawboning at this upcoming meeting this week. What that means then is that any further additional Lagarde commentary about concerns about the recent rally in the euro could well see some quite sharp moves lower in the euro currency given how markets are positioned, which are still quite heavy net long at the moment. So something to just contemplate and keep in mind. The other thing here was about the point about how can they tweak programs. Well, right now, obviously, the talk I just showed you with this graphic was talking about extending of the, uh, PEP and also the timing of how long they'll keep that in play. But there are other things as well. I saw one bank suggesting that it could be that they don't need to talk about topping up. They could— another thing to look out for is talk about without touching these parameters, the flow of buying. Now in terms of the usage of these actual bond buying mechanisms. Remember, they've kept like an overall package size that's been particularly large, but the amount actually being utilized was obviously much more heavy in March in the depth of the volatility that was seen in markets rather than now with the relative stability that we've had of late. And so what they could do then is just start to anticipate then if what we have been seeing is further coronavirus pickups to the likes of Spain and France again, is to get ahead of that. They could start accelerating some of the purchases again without actually changing the actual parameters of the ECB bond buying program. So something to just keep an eye on. All right, final few things to quickly touch upon. In the oil market, a few things. The, the kingdom's state producer, Saudi Aramco, has come out and reduced its key Arab Light grade of crude by a larger than expected amount for shipments to Asia, its main market. It is also lowering pricing for US buyers. Um, so Saudi's reducing oil pricing in a sign demand recovery is struggling. A few other things here. Labor Day in the US typically marks the end of peak summer demand season in the US. Uh, and then the third point, China has also slowed their intake in August according to latest customs data. And obviously China, one of the major importers of Saudi crude. So a couple of negative factors there. And just quickly on the oil chart, one thing I was looking at this morning was quite a key long-term technical level that I think warrants watching quite closely as we go through this session. Let me just remove my, my camera again just for one second. So Here we've got basically this area which was the 10th of July. We had a test on that, um, on the 30th, and here we are right now this morning. We've had a test on it again. So 3854 is quite a notable level. I'd say any break of that, and then the next real technical level on the higher time frames is not really seen as support until we get down to the 37 handle, that being the low that we printed on the 25th. 5th. And then you can see some respective resistance and support going back into May and June as we were recovering from that price dip that we saw on the pandemic recovery. So yeah, definitely worth keeping an eye here on crude. Some key levels, um, we're just testing at the moment in the context of some of the more negative headlines that we've had recently. Again, if equity markets do start to fall over again that could put some downside pressure as well, just generally on sentiment, which could then open up some, some question marks then over the overall global recovery with oil. But I think the two are a little bit disconnected. I did see one comment, and I think it was quite a good description. I think the equity pullback that we've had at the end of last week is some of the froth coming off the kind of boiling nature of the, the extreme rise that we had, particularly in the NASDAQ and the tech sector. So I don't think it's too much on that economic narrative. I think it's more profit-taking inspired. And so I think there's probably a very loose connection to thinking that there's a global ties to then real renewed panic in the market that would cause some of these assets like Equity North to move in a correlated fashion. I think they would move quite isolated if anything. But as I said, there's a few— there's a key technical level support support. If that breaks in, in the context of some of these more negative headlines, and then things like COVID numbers in mainland Europe, UK start picking up, um, then it could be something more meaningful for oil. But for the time being, COVID numbers that I was tracking over the US at the weekend still relatively looking good at the moment in terms of continuing to decline on all measures, as we were seeing last week. The other final thing just to mention was at the end of the week we do get US inflation data. We've got CPI and PCE, and US inflation numbers will be in focus somewhat just given the recent framework review that concluded in the adoption of average inflation targeting by the Fed. Inflation generally has been moving back up, obviously, as the economy in the US has started to reopen. We're coming off that real floor that we printed a few months ago in the midst of the main part of the national lockdown. And that is expected to somewhat continue. However, how important is this now, particularly just given how low we are away from 2% at the moment? I think perhaps actual— in actuality, probably less because of the nature now that it's not such a fixed line, that dotted green line in the sand of 2% anymore. There's flexibility for it to go below and above. And so actually, I think it'll be quite a key thing to watch, but perhaps not, not a massive deal for markets. And yeah, that, that is pretty much it. There's obviously other things. Bank of Canada meet this week, but they're expected to keep rates unchanged, so not expecting any real policy movement there. But yeah, there's a full calendar here that I'll share later with you guys anyway if you need it. But that's it, not going to go into anything more. So really, ECB is the main focal point. Quite a few things going on in the UK and Brexit talks restarting, but cable is underperforming and it could well then just continue that theme as the outcome of talks in the 8th round negotiations is likely to conclude in the two sides still being quite far apart in my opinion. Some, some heavy nature in terms of price action trading in crude oil overnight, and then yeah, as the week progresses still a little bit fragile in US equity sentiment, really waiting for the US to come back tomorrow to see the volumes pick up again and see where we go from there. But that's it. Any questions at all, feel free to drop a comment. Happy to help as usual. But have a good week ahead. Thanks very much.