Why Positive Economic Data Won't Last

OK, very good morning folks. It is Anthony Cheung here at Amplify Trading. It's Tuesday the 7th of July and overall equity markets finished higher on the close on Wall Street yesterday and we've had another gain in the Shanghai Composite last night, now up for a 6th day in a row, bringing this month's gain now to about 13%. Bearing in mind we're only on day 7. Of July at the moment. So question mark, and what I'll cover in the briefing today is about how, how sustainable is this rally that we're seeing and overall positive sentiment, and in the midst of still ongoing pandemic, of course. Otherwise, as per usual, please make sure you like and subscribe to the YouTube channel if you're watching this on there. Don't forget as well, always feel free to leave a comment if you want to ask me any questions at all. I'm always Happy to help. But let's have a look at the, the charts this morning then to get a general feel for sentiment across the different asset classes. And as you can see, the equity index futures were pushing up in toward the close in Wall Street and initially peaking then in the Asia-Pacific session. Before then, we've kind of drifted south. There were some reports overnight in regard to Chinese state media now pointing to the need for rational investing given that ramp that we've seen in their local markets. Underpinned in recent days by the country's state media, which essentially was encouraging retail trader base to buy into the rally. And trading volumes overnight in the Asian session for the local domestic market in China were about 130% higher than their recent average. So yes, I guess whenever something rises that aggressively, that quickly— as I said, in the course of 7 days, the Shanghai Composite is up around 13%, which is, which is phenomenal. So a little bit coming off here, and a call for rational investing being ushered overnight has just got a few people wondering whether or not this is truly sustainable, just given the overall situation more globally. Of course, we're not out of the woods yet, although the market has decided to relatively brush aside the COVID developments in the US. There's still this outbreak in Australia as well, so things remain precarious on that front. So a little bit of profit taking perhaps on the run-up that we had yesterday. I mean, yesterday was particularly quiet. You can see in the S&P in the center right chart, we were generally respecting a range until we saw the breakout, which really didn't happen to the Asia-Pacific session. So what's quite interesting in this European open, we're just breaking the lower bound of that range that really held the price activity in Monday session in the S&P future. Similarly then, in gold it's pretty flat. I'll just be keeping an eye on that overnight Asia-Pacific low. It's tested and bounced a few times already this morning as Europe has come in. That would be around the 1792.5 level. T-notes just edging up ever so slightly as equities weakened in the overnight session. So the 10-year is up 5 ticks. Oil in step with equities then, down about 50 cents and just trading below what was the low print that we saw yesterday afternoon at around the kind of pickup in volume on the traditional NYMEX pit hour timing with that daily pivot S1 level. So a little bit of an extension of the loss, just finding some support around the $40 handle, but any further push to the downside behind $39.84, which was the low that we had going back to last Friday in the light electronic trading session for for the US holiday. FX markets, the DXY is up marginally, just given some of the moderate risk-off tone developing. So DXY is up about 0.14%, exerting then some minor downside pressure in both major pairs, but fairly contained, only around 10 pip losses at the moment. So that's the overall kind of feel of things. Let's go into some headlines then, starting off with this. What are we looking at here? Well, we're looking at the black line is the S&P 500. We see the roller coaster we've been on, pricing in the, the pandemic on the March kind of route and then recovery. And the bars are indicative of the CFTC CME E-mini S&P 500 net non-commercial futures position. So the Commitment of Traders report, otherwise known as the COT, was released yesterday, which is an unusual timing but owing to the US holiday that we had at the end of last week. And looking at non-commercial future positions, so non-commercial being that then of, I guess, speculators in the market, portfolio managers, hedge fund managers, people who are not using it for the purpose of commercial terms like to do with trade and agricultural goods, for example. So the more speculative side of this, what you've been seeing is we were really heavily positioned short only about 2 weeks ago. Uh, but obviously we've continued to see a sustainable rally. Now you can see why people were short 2 weeks ago, because we had run up ever so quickly to 3,200, which, given how net short the market was, perhaps then a few people getting squeezed on those shorts. And as we started to drop from 3,200 or in excess of that point down to 3,000, people looking to add to that position thinking that the market was looking quite heavy. And in fact, then this was that telling sign because this would be in step with then the commencement of the second wave virus started to pick up in the likes of the Sunbelt states in America. But then get— they got that wrong. And, you know, they were heavily short and the markets continued to come up. And, you know, what the headline would suggest here is cover me. So a lot of these shorts getting covered now and continuing to just bump the market back up in toward that 3,200 again. And as you can see, reflective in the overall non-commercial futures positioning is a significant reduction in shorts that we've had since where we were just 2 weeks ago. So yeah, quite interesting on the underlying there, with people still having a difficult time trying to gauge then the market's perception, having been 2 weeks ago ultra-sensitive to Corona updates as we were right at the beginning of that second re-acceleration phase of the virus in North America. Now it's seemingly— it doesn't really matter anymore, at least for the time being, with a number of those key states obviously halting their reopening, but it not impacting really market psyche too much. But we're going to come back to that point. We're going to discuss a few things in more detail. Before I get to that, I did mention a couple things about China overnight. One thing I would say is that obviously that, that infamous trade war loop, that cycle about the kind of US getting tough, and then markets start to panic, and then all of a sudden you hear a conciliatory tone, then it looks like they're going to progress, then they don't, and we go round and round. Well, obviously the, the latest kind of intensity of US-China trade talks has been slightly elevated. I'd kind of classify it as moderate though in the context of what we've seen over the last 2 or 3 years. But Chinese officials, in the Wall Street Journal, according to sources overnight, believe that if they keep ramping up agricultural purchases, it will help keep the deal alive. The US Trade Secretary Robert Lighthizer and Chinese Vice Premier Liu are to lead a phone conversation in mid-August to assess the deal's progress. And this follows earlier reports from pressure from US business groups who've called on China to uphold its purchases commitments under the deal. So again, it's kind of almost like things have been a little bit tense, and so out comes the journal source, which of course is, is well-timed to suggest then that China will be commitment committed to ramping up those purchases. And that has always been the kind of glue that's held the deal together. No matter what you're saying, uh, politically, publicly, from Donald Trump criticizing China, at the end of the day, as long as China are buying those goods, um, you know, the, the relationship will continue at that point in time. The other things, well, this morning before we, we move further forward, we have some German data. Industrial output for May, month-to-month, 7.8%. That was slightly below the expected 10%, just so you're aware. Um, the other thing overnight, you had the Australian Central Bank decision. So they kept the cash rate and 3-year yield target unchanged at 0.25%, but absolutely as expected. They did note the downturn has been less severe than earlier expect— expectations, and conditions have recently stabilized. However, don't forget that right now, of course, Australia is trying to deal with a quite severe outbreak of new infections in Melbourne, the second, second largest city by population in Australia. So New South Wales and Victoria, the nation's most populous and economically powerful states, are set to close their borders tonight. Of course, and as we discussed yesterday, it's the first time that's happened in about 100 years. So yes, things not as bad as perhaps expected in the rearview mirror, but going forward, kind of like the situation at the moment going into the US, is, well, what does the future hold now, given the fact that a lot of reopening has been halted and we're seeing renewed cases of coronavirus? On that front then, this leads us into a bit of a narrative for the US side of things, which of course is the focal point for markets. And this was an exclusive in the Financial Times, citing the Atlanta Fed President Bostic. Now he said the rebound in the world's largest economy is in danger of stalling as a result of the recent spike in coronavirus infections across several large U.S. southern and western states. So the headline reading that he warns the U.S. recovery may be leveling off. He's troubled by the data on business reopening. So let me run you through a few things of why this is quite interesting. For one, whenever you hear Federal Reserve officials speak, again, if you're, if you're new to markets, the key is the kind of table here that all traders will be aware of, which is the current members who have voting rights as members of the Federal Reserve or the FOMC in this case. And every year this alternates, you have then a rotation of some of the alternate reserve districts, and then you have a board and a chair. The board and the chair remain fixed over a period of time, so you can see they're constant ticks for the likes of Powell or Brainard, for example. However, you can see these, these crosses and ticks that would, would reflect the, the rotation. What you've got here then is Bostic. And the next important thing then is, after are they a voter or non-voter, because that will dictate then their ability to really sway the overall needle on the decisions that get made, is where do they sit on the spectrum of being dovish or hawkish. And Bostic, you can see from Atlanta here, kind of mid to slight, mild hawk. And so to hear Bostic saying these types of comments is quite interesting because overall they're fairly downbeat, which would be somewhat uncharacteristic for someone of a more hawkish disposition. But just to remind you, Bostic is a non-voter for, for this year. But where does that leave us then? Well, at the moment, you know, what we've been seeing and what has been kind of a difficult thing, I think, for a lot of people to get their heads around is that this is the, the Citigroup Economic Surprise Index, and it's looking at the US in blue, eurozone, uh, and global. And obviously these, these economic data points that we have been seeing have been phenomenally strong, outperforming market expectations. But a lot of these economic data points, when you look at them and how they're constructed, a lot of them are what we would classify as soft more sentiment-related, forward-looking, yet then for that future expectation to materialize. Unlike hard data, which is the factual evidence then of how things performed, like last month's retail sales or industrial production, rather than how do you feel about the economic conditions over the next 6 months, for example. Now, the reason why that's quite tricky to really analyze with accuracy, that data, or have full confidence in it is because if you were to ask someone, what do you feel about the next 6 months? Of course they're going to be more positive because you're coming from such a low starting point, given how negative general confidence was back— if we go to March, April, even May, when we were in the right midst of the lockdown, when coronavirus is really taking hold and went into global kind of pandemic status. So yeah, this is quite interesting, and it leads us on to different things. Obviously, a lot of people are still looking at certain states in America, predominantly those like Texas, California, and Florida, being so important overall because they, they, they almost make up about 30% of the entire population of the United States of America. So how they are performing, how open or not their economies are is particularly key. Now, one of the things here then that I've been looking at is the fact that, you know, if you were looking at the, the data coming out, you would think, wow, things are really positive, things are looking really great at this point in time. However, I saw an interesting note coming out of the US firm Jefferies, and they said on Monday that its index of US economic activity had clearly flatlined after 2 months of improvement. So sure, we've had this massive bounce, but what they're seeing now in the data, which is yet to materialize in the more standard, let's say, datasets, is that things have started to stagnate. There's a loss of momentum in the broad-based spanning small business activity, discretionary footfall, restaurant bookings, traffic congestion, and web traffic to state unemployment portals. So what they're saying then, they're referring, referring to data sources that update more greater frequency than official statistics. So to make that make more sense, you can look at, uh, if you just go on Google, you can look at the COVID-19 community mobility report. And essentially what this looks at then is you can punch in different countries, and in the case of the US, different states. So what's quite interesting here is looking at these mobility changes to then try and get a greater sense of, well, where are we now in order to predict then what the future data might look like? Because we're in an interesting phase. We've gone through the worst of the pandemic so far, that is, touch wood. We then had this quite steep recovery in confidence, and that's been reflected in markets. But because of this second wave, although markets aren't reacting now, how is this going to alter the shape of the recovery going forward. And what's quite interesting here is when you look at these mobility reports, you can start to see then, well, look, people are in— this is looking at California, for example. People are still hitting the parks much more so than normal. Grocery and pharmacies are up slightly, but retail and recreation are still massively lower, this being trends for places like restaurants, cafes, shopping centers, theme parks, libraries. Movie theaters, these types of things. You know, if you look at transit stations, places like public transport hubs, subway, bus, train stations, workplaces, you know, it's still down 40%, 58%. So when you're looking at some of these data points and you're thinking, wow, look, things are even better than they were pre-pandemic, well, actually, if you look under the ground at these alternate data sets, we are nowhere near normality here. And, you know, if you look at the other areas, so Texas, it's a very similar story. Retail, recreation down 15%, transit down 29%, workplaces down 56%. If we look at Florida, same case, down 20%, 42%, and 53%. So the point being here is I just think we need to, to be mindful of monitoring this type of information. Because I do think that ultimately this graphic of these upside surprises will not last forever. And then at that point, then, does the market start to come back a little bit? And by that I mean just rein in some of this kind of positivity that's been quite evident in particularly elevating the stock market, for example. I still stand by kind of what I said yesterday. I don't really personally read too much into the Shanghai Composite, just absolutely smashing it at the moment. Um, I don't think that translates immediately into the fact that, yeah, you want to get long everything. I think that's a little bit more isolated, and particularly just given the moves from overnight, you can see the market outside of ex-China started to get a little bit fatigued by that story, and China themselves looking to rein it in a little bit with a secondary state media post to follow it up talking about the need for rational investing. So yeah, they're all the main things I wanted to discuss this morning. Hope that all made sense and was, was interesting. But looking at the calendar for today, we've already had the RBA and the German industrial output. So otherwise, from a European perspective, there's nothing really of great substance coming out today. Going into the afternoon, I'm afraid it's the same case for the US, not really too much going on. The API weekly inventories coming up this this evening at the usual time, 9:30 in London, 3:30 in Chicago. Speaker-wise, you've got a couple of speakers, but none of them are really happening until later on, if in London in the evening. But you do have a gilt auction if you are looking at UK fixed income. All right, that is it from me. I'm going to leave it at that. As I said, absolutely more than happy on this video and any of the videos that I do to answer questions and engage on the comments section. So feel free to take advantage of that, and I'll see you guys same time tomorrow. All right, take care and have a good session ahead. Thanks very much.