Why Trump's Bark Is Worse Than His Bite

Okay, very good morning everyone. It's Friday the 19th of June. I hope you are doing well. Don't forget to subscribe to the YouTube channel. We've got Eddie's latest video coming Saturday morning, and then Sam's technical video for the week ahead is also going to be released on the Sunday as well. So remember to hit that subscribe button, click the bell icon to get notified soon as those sessions go live. But let's just jump into the charts and look at what's going on this morning. And relative risk on at the moment follows a slightly mixed close on Wall Street. But you can see here equity index futures have just been edging up this morning. In case of the S&P 500, we're just coming to a retest of the high print that we saw in the overnight session and also around the highs that were seen yesterday morning in the European session. Likewise, the NASDAQ 100 now continues to push on firmly above 10,000, which is also a break of the 17th high, which if we look on a 120 chart means then that the NASDAQ now looking fairly bullish, having gone above that point and opening up the prospect then for a run back up to these, these all-time highs. So, you know, those people who are still of a fairly bullish disposition despite some of the negative movement that we've had in markets, particularly a week or so ago. The market just continues to respond as it has done on prior occasions. This comes with, you know, in the briefing this morning, I'll get you up to speed with, you know, Trump and China. There's been a few developments. We've also got the EU leaders meeting today to discuss their recovery fund. Uh, and also I had a few questions yesterday about the pound and why did it move lower despite, um, some of the announcements that were made and so on. So I want to have a conversation about those things. But elsewhere, oil following in step with equities, so that pattern continues in regard to its tie to just general risk appetite on the global picture. So despite the likes of the CDC in the US reporting coronavirus cases continue to increase. Texas coronavirus cases rose by 3,516 to a total of nearly 100,000, which was the largest daily increase on record for the state. New York cases rose 618, or 0.2%, which is in line with the 7-day average. So at the moment, it seems that despite the worsening situation in some of those those key states that, again, as I've said before, did spook the market around this time last week. It seems though that that has not kind of spread into a wider nationwide situation. It certainly is more focused in specific states, and it seems like the market's happy to take that in its stride, at least for the time being. The other outbreaks as well, there's nothing really too much I've read this morning to suggest that things are getting materially worse in China at this point either. And of course, that was something which was dampening sentiment somewhat at the beginning of the week on that outbreak in that market in Beijing. So yeah, I guess COVID remains the same situation. It's an ever-present risk, of course, for markets. But for the time being, there's no kind of shocking developments that would suggest renewed aggressive outbreaks in new areas. And I guess that would be the point of which the market would react more negatively because areas like Texas, now people are aware of what's happening. Um, T-notes then, uh, down a touch, down 4 ticks, sitting around the pivot. Gold again, slightly counterintuitive in the fact that actually it's moving higher at the moment, so it's up about $8. In the FX markets, uh, Dixie's pretty flat, the major pairs up a touch. Cable up 23, just reversing the fairly hefty move to this, to the downside that we saw yesterday. And so on that point, let's kick off with that. Um, what exactly did the Bank of England do yesterday? Well, of course, as we were assuming, they did increase their quantitative easing program, but the kind of devil is in the details. And obviously context is really important at the moment. You know, a lot of people were kind of asking me at the time before the announcement, how would you expect the pound to react upon the announcement of QE? And on QE alone as a figure, the bigger the figure— and I— if the market is expecting 100, if it comes out at 200, the net result would have been you were looking for a positive reaction in sterling, even though that in more normal economic times, increasing of the money supply should in effect weaken your your currency, the value of it. And so here, the focus being then on the more that they can support the economy, the more stronger the recovery, and the better that is then for the economy, the better it is for the British pound. However, they delivered 100, and so that wasn't really, I think, a great deal of a shock, although there were some people looking for more. One of the main things that came out of it was the fact that there was around a two-thirds cut to the weekly pace of government bond purchases from $13.5 billion recently to an average of what they anticipate of around $4.5 billion for the rest of the year. Now that's, that's quite important. So what that's basically telling you is that they're, they're expecting tighter financial market conditions. And so if anything, we've just had retail sales, for example, come out in the UK this morning, and it's a lot better than expected. However, I'll kind of go into why that is in a moment and why the market doesn't care really. But economic data has been perhaps not as bad as feared. There's a couple of economic data points that have been, if anything, outperforming, kind of similar to what case what we've had in the US. The big difference here is that in the US, although non-farm payrolls, US retail sales, these types of things have been pretty spectacularly strong the Fed has remained in kind of ultra-accommodative mode, you know, unlimited bond buying. What the Bank of England did yesterday is basically saying, well, actually, yeah, we're going to do more QE, but we're going to slow the pace of which we're doing it. And actually, then, that's, that's a slightly more hawkish kind of situation as far as then, um, the ability or this idea that more is good, they're basically taking it or ramping it down a little bit. And so hence the reason it's received as a little bit negative. The other thing is, you know, when Andrew Bailey was, was questioned, and this put more pressure on gilts in the fixed income space in the UK, was that policymakers didn't— did not discuss negative rates or yield control. So, you know, there's a lot of people that were getting I think at the time I was saying this on the briefings, I think a little bit ahead of themselves with this idea about negative rates. Um, they didn't even discuss it, you know, never mind, you know, getting towards pulling the trigger on it. And rightly so, they shouldn't be doing that at the moment. But the fact that they haven't even discussed it and they haven't even discussed yield control, you know, so that they're a long way off, um, you know, being what I am comparing to, which is some of the other central banks, i.e., the Fed, which is kind of there saying, look, we're going to do whatever it takes. The Bank of England haven't— it doesn't appear that they've really got to that point, and that's a disappointment for the market as far as sterling is concerned and as far as gilts are concerned. So there was a bit of expectation that, look, they were going to pledge to do more. But yeah, that's, that's the reason why I think, you know, It's kind of the Bank of England in summary signaling that they feel, for the moment at least, that look, we'll give a little more QE, but that's it. We feel like we've kind of signaled we've done enough now, and that spooks people a little bit in the short term. So would I be expecting this to spill over and start weighing on the pound now? No. But one thing I think that's quite interesting was that yesterday the one person who dissented the increase of quantitative easing was Andy Haldane. And Andy Haldane just so happens to be the Chief Economist at the Bank of England. So of all this roundtable discussion of these Monetary Policy Committee members, the one guy that you think, well, surely given his job title is going to be the one who has the most kind of focus on the economy, and he's the one saying, look, we don't need to do even more QE at this point, you know, never mind any of the other steps. So I thought that was particularly interesting, and it does lead to the idea then that we might get to the point where retail sales this morning— let me just bring up a tweet that I, I shared this morning— um, retail sales this morning in the UK was really strong. Now, is that a surprise? Well, no, I don't think so. It came in at 12% month-to-month expectations of 5.7. However, as this analyst is suggesting, is that the 12% month-to-month bounce in UK retail sales in May was totally unsurprising. This, this chap, Samuel Toombs, is actually a very well-respected guy. He's the chief economist at Pantheon Macroeconomics, so definitely worth a follow on the macro front. But he, he was saying that retail sales account for one-third of overall consumption spending. The former's recovery partly reflects then a reallocation of spending during the lockdown. So it's the latter point that explains the reason why it was such a sharp, uh, recovery in that figure. But what's quite interesting, if you look at the pound, actually when the data came out, the pound actually dipped. So even though it was strong, there are firstly some analysts expecting that to have been the case despite the median consensus being lower. But also, if you think about what we've just discussed with the Bank of England, well then, the stronger the data gets, then all the less accommodative that the Bank of England will remain. And so therefore, if you think about it, the euro 2 weeks ago, when the ECB over-delivered, when the German government over-delivered, when the European Recovery Fund kind of got into place, the euro rallied in a positive fashion. So if all these things start getting tapered back like what we're observing a little bit in the short term here in the case of the UK with the announcement yesterday. And if the data gets increasingly strong, well, all the more reason then for them to be less kind of extreme dovish in this kind of, uh, pandemic period. And that perhaps then just kind of removes a little bit the punch bowl that's kept markets kind of so elevated more recently. So yeah, hopefully that makes a bit more sense. Um, moving on, next story then. Looking out for leaders holding their video conference today to basically just discuss this, uh, €750 billion European Recovery Fund. As we've said before, they struck that tentative agreement, um, a week, two weeks ago, and that saw a generally positive reaction in the euro. However, that was kind of again a framework agreement. They've got to get the, uh, the details down, and this is where the potential complications could come, of course. So the program, which needs the backing of every capital city, would be funded by joint debt issuance, a significant step towards closer economic integration. And, and of course then, that joint debt issuance is where the difficulties will lie, because the Frugal Four, as they're known— so good to get used to these names, uh, they being from left to right: Sebastian Kurz, the Chancellor of Austria, uh, Frederiksen, the PM of Denmark, Mark Rutte, the PM of Netherlands, and Stefan Lofven, the Prime Minister of Sweden. So these are the people, particularly Mark Rutte of Netherlands, who's been quite adamant and vocal about the situation here in regard to the kind of, I guess, fiscal discipline and the idea that then, you know, they are in effect going to be picking up a little bit of the tab for what ultimately is a recovery fund that benefits countries not their own, uh, i.e., the likes of Italy and so on, those in more economically or, say, fiscally challenging times. Officials expect Friday's debate to formally kick off what would be weeks of negotiations. They've warned that there'll be at least one more session will be needed to reach a deal in terms of a formalized session like today's one, with negotiations happening in interim periods. So don't be looking for like a one-and-done kind of silver bullet that, yes, this is done. Or, or if anything, the risk probably lies on the other side, that there's just complete fallout when they start talking on this video conference call later. And if that puts into jeopardy then a backward step in this European economic integration idea on the recovery fund. I'd perceive that as a negative if that was to, to happen. So again, if you're picking a side here, the risk is to the downside because it's unlikely they're going to strike a deal this quickly because it's going to require much more discussion because it's quite a technically challenging, uh, thing to, to get done. The other subject matter that people are looking at Is this— Donald Trump basically last night, he threatened to cut ties with China. And remember, the US officials met in Hawaii midweek about trying to come together to renew dialogue despite some of the tit-for-tat that was going on between the two nations. So one day later, the former National Security Advisor John Bolton releases a very negative memoir on Trump And all of a sudden, they've gone from talking on Wednesday to now Trump saying that, look, we can decouple from China if we want to. That is a policy option. So Trump threatening to cut ties with Beijing, and obviously this is a political knee-jerk reaction to him now having to really ramp up. And you would expect this over the weekend as well, lots of anti-Chinese comments now because he's got to move the needle of public perception back to the fact that, look, I definitely did not cut any deals with Xi about getting me re-elected. We are not friends. There is no backdoor kind of deal here. And so he needs to get them on side, whether or not that is the case of what Bolton was saying was true or not. Wouldn't surprise me. But for Trump now, this is kind of a PR exercise to try and get the belief back that, you know, that he's willing to be stern with China, let's say. Interestingly, this does carry in my mind a little bit of a tail risk for markets because what is Joe Biden doing? Well, Joe Biden's going full guns blazing now. China, Xi is a bully. Trump is weak in dealing with the issue. And so, you know, if you have two candidates Saying all of this, there's obviously a possibility then that something could happen whereby necessity of trying to promote this anti-Chinese rhetoric, it just goes maybe a step too far, maybe trying to retaliate in some form, and then, you know, perhaps that could have a negative reaction. However, I would see that as not being the base case and that people will see straight through this political kind of narrative that these, these campaigns are going to hold in respect to China going forward, at least for the time being. This was the tweet that Trump did. So again, as usual, using the usual platform of Twitter to convey this type of thing. Interestingly, you know, despite the COVID despite what Trump and this kind of the situation with China— I mean, look at the markets this morning, you You know, it's one of these things here where, again, don't take news headlines, you know, don't just take them as they are. Try to question it and try to think of it a little bit more objectively as, you know, what are the purpose behind the people that are saying these comments? And as we've just discussed, you know, it's a pretty obvious response from Trump. It surprises me a zero amount of what he said last night. About China. And so when you look at these charts, you know, the market doesn't care because everyone sees it from the same perspective. So at the moment, you know, equity markets continue to remain, um, pretty buoyant for the time being. And, and so, you know, as we continue to punch higher, oil here testing the R1 now, which was the, the brief overnight early Asia-Pacific high. So it's going to be quite an interesting day. You know, T-notes have already got through that um, what, that double bottom that was seen as well in the kind of late US hours in the Asia-Pacific session. So everything's setting up at the moment for a fairly, um, kind of bullish start to proceedings. And when this type of activity is happening, it generally then starts to see an unwind in terms of the, um, the kind of premium into the US dollar. We've typically seen that, uh, the dollar move in response to— at the moment, if risk on, dollar weakness. And so therefore major pairs, particularly sterling currency, if it was a little bit overdone yesterday, perhaps room for, for a bit of a bounce on the cards. But I guess then the near-term challenge for sterling would reside at the pivot level in the near term, just coming up before there. So kind of a couple of areas of interest I'd keep an eye on there if I was looking at the The British pound would be kind of that area there, and then here as well. So if we were to come up, keeping an eye on that pretty firm area of resistance around 66, 69 here in the futures. So really here on any further recovery. And then the euro, now we're at pivot. I'd be looking at this kind of area here. So the cluster of those highs that were holding price activity, and yesterday afternoon you also got the low on a couple of prior occasions as well. It could be quite interesting for the euro and any further recovery here on the upside. So 1.12528 there. Final, uh, kind of stories, just going to point this out, it's had zero market impact. But thought it was worth a mention. Um, the economy in Japan remains in an extremely severe situation, but it has almost stopped deteriorating according to the Cabinet Office in Japan's government. They said overnight in its monthly assessment, it's the first time the government has upgraded its view, in fact, since January of 2018. So despite all that's going on, despite still, you know, as I said, this ever-present danger of COVID uh, the actual Japan government, the Cabinet Office, has upgraded their economic view. But again, the— that report, very seldom does it really move markets, but just worth noting. On the calendar perspective, a few things to be aware of here. We've already had those retail sales. The European Council meeting is going to kick off from around 9 AM, so a few hours' time. And then from a data perspective, it is very quiet actually. There's not a great deal coming out of the US, so Again, it's going to be more of a sentiment, technical-led session perhaps for the US afternoon. Do have a couple of speakers including, um, Fed's Powell and Fed's Mester participating in a live video conference talking, um, basically about the workforce, building resilient workforce in Ohio. So that's not going to come down until 6 PM London time. Fed's Rosengren, non-voter, is speaking on the US economy and current financial market conditions, that'll be at 3:15. The other thing here just to be aware of is this: it is, uh, of course quadruple witching, the simultaneous expiration of single stock options and futures, and the same for stock index options and futures. So for anyone who's not familiar with this, then basically on the third Friday of the month of every quarter— March, June, September, December, you get quadruple witching. And this can see a pickup in volume and sometimes lead to an increase, bounce of volatility. From an awareness point of view, depends what product you're trading. From the equity perspective, then you've got the FTSE at 10:15, Eurostoxx 11, the DAX midday, and then you get the US indices at the market open with Decat-Curant in France at 3 PM this afternoon. So do also keep that in mind at around the market open of the North American indices. That is it, nothing really much more for me to add at this point. So feel free to ask me any questions, of course. Just feel free to leave a comment on the YouTube channel. Don't forget to subscribe to make sure you get first access to those videos I mentioned over the weekend. Okay guys, have a good session ahead and have a great weekend.