Will UK PM Johnson Walk Away From Brexit Deal Today?

Hi there, I'm Anthony Cheung and I'm the Head of Market Analysis here at Amplify Trading. Every weekday morning I'll deliver a fundamental rundown ahead of the European Open, but if you subscribe to the channel, you'll also get content from the rest of the team. So let's begin. Okay, very good morning to everyone. It is Friday, 16th of October. Hope you are doing well. I'm just going to get straight into the, the briefing really, starting with the charts and giving you an overview of market sentiment. And we're going to delve straight into the major news stories because a couple of interesting things to look at, obviously from Brexit point of view, US stimulus and global COVID situation, given some of the enhanced restrictions we've been seeing in mainland Europe, the UK, and also keeping an eye on the US COVID numbers at the moment, which have been rising in what is strategically a very geographically important area of America, which we're going to discuss. So first off then, let's just look at the charts this morning. And does come after a lower close on Wall Street, albeit very minor, as per usual. The NASDAQ 100 outperforming, underperforming. So last night down 0.7%, whereas the S&P and Dow were down just around 0.1%. So decent recovery After that initial, what looked a little bit fragile in terms of sentiment in the European Open, the US kind of clawed back some of those losses. But certainly, as per some of the things I'm going to discuss, particularly around the cases on COVID, I think that definitely today's session could be quite interesting as we get in towards the latter stages of the day. We've also got some important economic data like retail sales also coming out of the US to be mindful of. But overall, the US stock futures are pretty flat. The DAX, if anything, is up 50 points, but has been just edging lower, giving up some of that as really Europe has come in and we head in towards the cash equity open. Otherwise, that sentiment is pretty much reflected elsewhere across the board. The Dixie's flat, so euro-dollar is unchanged. Cable is down just a touch, but that is one particular currency pair that I will be keeping a very close eye on. Today because of the soft deadline nature and the risk of Boris Johnson walking away entirely from the dialogue in negotiation over Brexit with the EU. That's going to be a real potential headline destabilizer, if I can call it that, and we'll discuss that in a second. Otherwise, gold flat, a bit of support around the pivot at the moment, so we're trading just above 1907. And then for crude oil, down, just giving back in the overnight Asia-Pacific session some of the gains that were seen during yesterday afternoon. So we trade down 50 cents at $40.76. But let's jump straight into it and talk about a few different things. And for one, just keeping an eye on the dollar, actually. Again, I get— I often get asked questions about the relationship in regard to gold in the kind of flight to quality traditional asset that it normally would be in times of when people are disappointed about the speed of the forthcoming US fiscal stimulus. They are getting worried about the enhanced restrictions seen globally as coronavirus cases again start to worsen. Why isn't gold going up? But this is where I think you just need to be a little bit more adaptable to how correlations are working in the context of this point in time. And at the moment, And as per has been the case in recent weeks, if not months, the gold has been— or the gold price has been much more sensitive to the inverse relationship to the dollar. And in this case, what I'm showing you here is a graphic of the US dollar index. And we're at quite an interesting level now, coming back up towards close proximity to 94. 94 because, as you can see here, it has provided an area of resistance back on the initial move higher in August. On two occasions, but also in early October, and here we are again. But overlay that as well with the top end of this kind of downward trend channel from where we were, from the— this encapsulates the price movement of the dollar, which generally has weakened, of course. But a lot of that has come on the back of the notion of the Federal Reserve doing more and easing and all of the weird and wonderful mechanisms they created in order to safeguard the economy from utter collapse given the severity of the initial lockdown. Whereas now the dollar has kind of moved back in towards this reserve currency status. And every time we start to see any weakness at the moment— and this was very prevalent in gold this week, back on, I think it was Tuesday, when gold sold off quite aggressively. Even happened yesterday's session. As soon as the Dixie starts moving higher, That's a weighing factor for gold. So kind of two things to bear in mind here. For one, definitely keeping an eye on the dollar. A break around that 94 region could open up some further potential upside, and that could be accelerated if we start to see then a bit more panic about the kind of still the remaining cases of the lack of stimulus and the coronavirus situation. If that does happen, and let's say Boris Johnson walks away from a deal, which I'd see as a distinct possibility today. The knee-jerk reaction there could be quite violent to the downside in sterling. So definitely something to, to bear in mind. But obviously a dollar move like that would be prevalent for all the other currency pairs, and particularly EURUSD, which is sitting technically around a level of near-term intraday support from yesterday's lows. That would also, of course, be something to look out for, for gold. But from a cross-asset class correlation, I'd want to see equities weakening to play out that kind of type of narrative, if you like. So yeah, definitely to look out for. But I'm going to talk first of all, I'm going to talk a little bit about the stimulus and then we'll go into COVID. So on the stimulus situation, it's more about updating you where we're at at this point in time. And I think it's really important actually, because for me connecting the jigsaw pieces of the political puzzle, I can see in my mind's eye where I think that these stimulus talks are going to be heading. So the latest is that President Trump has said he is willing now to go beyond the $1.8 trillion offer for relief that's already been put forward, but Senate Majority Leader Mitch McConnell has rejected that. Now, Treasury Secretary Steve Mnuchin has told House Speaker Pelosi that Trump would personally lobby to get reluctant Senate Republicans behind him on any stimulus deal they reach. So let me summarize this for you. Basically, the Trump team are saying, look, we are willing to go higher towards your number, and I, the president, will personally persevere to rally the Republicans around that to get what you want. So this is actually— it's almost like dangling the carrot here. The Democrats are very nervous about giving Trump a political win this close to election, of course, because if Trump can secure secure it. You know what he's going to say and how he was chiefly responsible for securing that deal. But interestingly then is the second part, which is what we're going to talk about, which is this. This is a map, of course, of the United States of America, but I want to draw particular attention here to the Midwest area, which is here encapsulating this area which has the most darkest red colors. Now that's looking at the average daily cases per 100,000 people in the past week. So remember what we had in America. It's been super interesting, actually, from a, uh, a geographic point of view. It was the tri-state area that got hit first. I think it was an inappropriately titled second wave, which was then the southern and western areas, which— look at those areas now, very low in terms of cases comparative to what is now the Midwest. So we've kind of gone in 3 segments here. This was the first area, followed then by the South and West, and now we're hitting in the Midwest. Now, therein lies a particular big problem, I feel, for Donald Trump, and hence the reason why I think he started to be a little bit more vocal about wanting to meet the Democrats on the number on the stimulus bill. And this is because the US has reported the most daily cases in 2 months nationally, but the Midwest states are seeing the biggest surges. Wisconsin, Ohio, North Carolina— now North Carolina's a little more over on the East Coast, of course, but those other areas here, Wisconsin, these are key battlegrounds. These are the ones that really define an election because on a national basis Biden's still ahead by about 9.6 points or so on the latest RCP poll. But if you look at the actual battleground polls on an average basis, Biden is only ahead by around 4.9. However, he has started to eke out a little bit more of an advantage over recent days. Now for me, this advantage gets bigger the worse this gets, because a lot of these Midwest, uh, Midwest areas in America, not only are they key battlegrounds, these are ones of which Trump previously secured in order to win when he beat Hillary Clinton back in 2016. Now, the problem that he's facing at the moment is that a lot of these areas are now showing record jumps in their coronavirus cases due to local— or according to local health departments. Not only that, the other key battleground areas, predominantly Florida down here and also Arizona over here, they have also seen significant jumps in infections as of yesterday. So this really couldn't be worse an issue for Trump in timing of coming to just, what, 2 weeks or so into a U.S. election, because these are significant areas, particularly the likes of Florida, of course, but also so Midwest states carry some decent-sized Electoral College votes, and he doesn't want the coronavirus to be at the center of the debate because it's a difficult one for him to manage that he's done a good job when there's a tangible kind of figure associated with the people getting cases, and even worse if the death toll starts to accumulate. So what do you do if you're Trump? Well, I pivot and I start talking about stimulus, stimulus, stimulus. Why aren't you doing stimulus? People's jobs are on the line. If anything, I would use yesterday's rise in initial jobless claims, which saw a moderate but a surprise jump, the highest since now August that we've had in those jobless claims. I would use that as a reference point for me to say, look, we need to get stimulus. I tried to detract attention away from coronavirus. And as coronavirus gets less, I think the Trump team will try to pivot and, and say that really it's the Democrats' fault for not then compromising, giving. Now I'm coming to their level. And because the Democrats don't want to do a deal this close to the election, so yeah, it's quite interesting looking at it from that political point of view. This is very difficult now for Trump. if these case numbers in these specific areas start to get worse, because these are really significant for what will define probably the outcome of the election. And these are really key areas. But you can already see what he's trying to do, which is to comment some overnight, upping the stimulus number, committing to lobbying reluctant Senate Republicans to get them over the line in order to persuade Senate Majority Leader McConnell to get on board. This then puts the fault at the Democrats' hands. You force them into that corner then. Um, so it'll be interesting to see how this obviously plays out. The one thing I would say is that I'm feeling a little bit like going into the weekend these numbers are getting worse. And so we've tended to see a little bit of apprehension. Of course, no one really wants to hold an open long position going into the weekend when short-term it might see a gap lower. That's not to say though on Monday— what we have been seeing in the past 2 months or so ago, gap down and recovery. Ultimately we do recover because then we kind of push more towards getting a deal done on the stimulus side. But I just wonder whether people would want to carry that risk into the weekend. So potential for downside. And overlaying that is the expiry of options contracts on US equities in indices and ETFs as well today. So also to be aware of on that front, finishing off with COVID This was the other thing, of course, which is the COVID-19 pandemic has definitely worsened this week across mainland Europe and the UK. So here you can see the hotspots, as we know, northern part of the UK, which has gone into more stringent tier 2 level lockdowns now, that including London, and obviously even more stringent in some other cities in the north. Northern Ireland, of course. Then you've got areas in Spain, France, and the Czech Republic seeing the worst numbers at present. But yeah, definitely a bit of a sea change overall, I think, with the general market perception on this, given the UK, France, Netherlands, Spain, Portugal, and the Czech Republic have all unveiled new virus-related restrictions this week, which of course does mean then, all things remaining equal, In the near term, I'd say policymakers haven't really got anywhere nearer in terms of talking about yet any new forms of monetary or fiscal stimulus. So markets might react negatively to developments until that conversation arrives. So definitely an interesting way to look at it there. And then secondly, we've had a number of drug companies obviously hitting some speed bumps on the way to their clinical 3 trials for bringing their vaccine further forward. And the latest is remdesivir, which of course is one of— was one of the first ones which really the market was quite sensitive to, if you remember, from Gilead Sciences. And this was one of the treatments that was used as part of the cocktail to get Trump back up on his feet a few, few days ago. Now don't get me wrong, remdesivir is not the silver bullet fix, the vaccine. It was actually designed to tackle Ebola, but it has properties I think that, that could be used in order to help in certain effects of COVID-19. But the idea here being that the latest study from the WHO, the WHO, the World Health Organization, have said that the drug has no definitive effect on hospitalized patients' chances of survival. So it's a bit of a blow as well on that side of things. And particularly, particularly again for Trump, given that that was one of the drugs that he was using. So, yeah, plenty to think about there. But let's talk about Brexit. And definitely today is a, is a symbolic day. Sure, this was that soft deadline day of which the UK and Europe were supposed to have secured a deal in order to buy enough time then to be agreed, ratified, and put into law in order to then a smooth process, an orderly transition into then the new trade relationship that we'd have. But couldn't be any further from the, from that situation at the moment. So the latest here is that Boris Johnson is set to decide today whether to abandon talks with the European Union. So today he's going to make a decision. Now, the EU released a communiqué yesterday which has ruffled a few feathers because from the British point of view, the UK are unhappy because Europe have not committed to say they're really all behind channeled talks, getting a deal done, whatever it takes. And so what happened— and again, this is politics kind of all playing out— soon as Michel Barnier was just about to take the stage to deliver that piece, his counterpart David Frost, the UK negotiator, tweeted, of course, to express his disappointment that the summit's official communiqué didn't contain the hoped-for pledge to inject fresh impetus into negotiations and put the onus on the British government, uh, or, and the European stance to put the onus on the British government to make concessions. So apparently sources suggest that that's really ruffled some European officials, uh, that type of quite hard, that, that, that type of rhetoric coming out of Frost. And that's actually made them, uh, strengthen their stance in an anti-way. Going into these negotiations. But overall, Downing Street has declined to say whether Johnson will pull out of talks altogether. But Tory MPs have long speculated that the Prime Minister would engineer some kind of political crisis as a prelude to make concessions to secure a deal. And therein lies, I think, a really important point if you're trading the intraday market today. And that is, I think, I think that there is quite a high likelihood that Johnson does just pull the plug here. Now don't get me wrong, pulling the plug doesn't mean you can't put the plug back in. Now by, by pulling the plug again, I am trying to cause maximum leverage, political crisis on the table, in order then to kind of withdraw and extract some form of of concession. In any negotiation, the other party has to believe you're willing to walk. So tactically, I actually think it would be a good move from Johnson to just say, you know what, it's not working for me, I'm, I'm done, I'm walking away. And then knowing full well that, look, I've got a timetable here that I can work to, um, the end of October, early November is seen as the last likely moment a deal can be struck in time to be implemented in time for year end. But then mid-November, on the 16th, EU leaders meet in Berlin. If negotiators from the two sides manage to strike an accord, they expect their political bosses to approve the agreement. You've then got European Parliament meeting at the end of November. They'll ratify the deal. Dec 10-11, another EU summit. If a deal hasn't been signed, expect preparations for Britain's messy exit from the single market to figure prominently on agenda. And then of course it's the end of the year and the end of transition. So for me, there's two main points here. One, if they're going to do a deal, I think that the deal will come closer towards mid-November potential. If not then, then I think it's going to be mid-December. Now given how this has played out so far, if I was going to pick a side, I'd actually say we're going down to the wire, because nothing sharpens the mind than a genuine hard deadline. These are too soft, in my opinion, to really break the impasse. And what that means then is that if we're looking at the pound and how it's likely to react coming back to today, I think if then Johnson pulls the trigger and he does do, as they say, he kind of goes nuclear and says, right, that's it, no more conversations, I'm walking away. Even though we know he's bluffing, that doesn't mean that the pound might not see quite a severe initial knee-jerk reaction lower. If you then couple that with a technical breach out of that downward trend channel in the Dixie, and the dollar starts firing up as equities, if they do start coming off, promote a flight to quality in the greenback, That could be quite, quite an exaggerated move potentially for sterling. The opposite though, if we're talking scenarios here, if they come out and all of a sudden— I don't know, Merkel was trying to offer a little bit of an olive branch last night late in the game as Europe have taken quite a firm stance. If for some magical reason they come together and it's all— they're able to make some tangible progress here and Europe switch their stance, which I think is very unlikely given that official communiqué, then yeah, the pound could really rally for sure. One thing to bear in mind here is that you have to be very agile to trade sterling, and with all the headline risk particularly associated with today, it's going to be a very dangerous product to trade. So if you're a new trader, I would say probably better steer clear of it, quite frankly. Or if anything, just wait. Don't have an open position on, just let it play out. And if the big headline comes, there probably will be opportunity thereafter to get involved if you're that type of more assertive, aggressive trader. If not and you prefer more range-bound kind of pullback strategies, and just wait, um, would be my advice. Just seeing Dominic Raab's on the newswires right now, um, Raab mirroring Frost's statement saying the UK is disappointed and surprised. UK cannot have— cannot have to make all the compromises, but we are close to a deal. So Rab coming out and saying similar at the moment. But yeah, it's going to be a busy day for sterling for sure, irrespective of the fact that I think all in all we remain at the same situation, which is they will ultimately continue to start talking. But that doesn't mean there's not some downside risk but also potential upside relief risk today as well. Okay, final things. The calendar for today, it is quite interesting. You've got really, it's the US-centric session. The eurozone CPI figures are final for September, so unlikely to be too much of a focal point. US retail sales are expected to see a moderate uptick when they come out for the month of September. We've also got the latest industrial production, manufacturing productions out of the US, and then the October preliminary University of Michigan sentiment, which will be quite interesting, of course, given it's the preliminary reading and forward-looking for this month. Um, but that is it. I'm not going to go any further than that. I'm going to let you guys get on with the session. I'm going to wish you a lovely weekend ahead, and I will see you guys on Monday. Take care, stay safe.