Amplify Weekly Strategy: 18th - 22nd March 2019

Amplify Weekly Strategy: 18th - 22nd March 2019

CALENDAR HIGHLIGHTS


Monday: JN Trade Balance, Industrial Production, Capacity Utilisation, EU Trade Balance, GE Bundesbank Monthly Report (tentative), UK Rightmove House Price Index, US NAHB Housing Market Index, RBA Kent speaks Tuesday: RBA Meeting Minutes, IT Trade Balance, UK Claimant Count Rate, Employment Rate, Average Earnings, Possible Date for Meaningful Vote 3, GE/EU ZEW Economic Sentiment, EU Wages, US Factory Orders, API Weekly Inventories, NZ GDT Price Index (tentative), NZ RBNZ Bullock to speak Wednesday: JN Monetary Policy Minutes, GE PPI, UK CPI/PPI/RPI, House Price Index, DoE Weekly Inventories, UK Parliamentary Vote on Brexit, US FOMC Meeting, Summary of Economic Projections, Press Conference, NZ GDP Thursday: JN Holiday, AU Employment Change, Unemployment Rate, RBA Bulletin, SZ SNB Interest Rate Decision, European Council Meeting (Article 50 extension decision), EU ECB Economic Bulletin, Consumer Confidence, UK Retail Sales, Public Sector Net Borrowing, BoE Interest Rate Decision, US Philly Fed, Current Account, Weekly Jobless Claims, CA ADP Nonfarm Employment Change, AU Manufacturing/Service PMI Friday: JN National CPI, Manufacturing PMI, FR/GE/EU Manufacturing/Service PMI, EU Current Account, European Council Meeting (Article 50 extension decision), UK BoE Quarterly Bulletin, CA CPI, Retail Sales, US Manufacturing/Service PMI, Existing Homes Sales, Wholesale Inventories, Federal Budget Balance


MACRO OVERVIEW


Anthony Cheung - Head of Market Analysis (@AWMCheung)


From political events (Brexit) and economic data (US factory orders/global PMI's) to central bank decisions (The Fed and Bank of England), this week should be interesting on many fronts. Here's a few things I'm watching this week.


Deal or no deal...


Starting with Brexit, where Theresa May is aiming to bring back her negotiated deal for the third time of asking after suffering the fourth largest defeat in parliamentary history last week (149). Although this sounds like a large margin to overturn the PM's team have been out in force this weekend with Chancellor Philip Hammond stating over the weekend that some Eurosceptic Tories maybe warming to the idea given the risk of voting her down.


The PM has also upped the stakes by saying that asking British voters to take part in May's European parliamentary elections would be a "potent symbol of collective political failure", a clear tactic to try and force MPs to support her deal at the risk of having no Brexit at all. In order to make things clear here's a useful infographic via the BBC.




From a numbers perspective the PM needs to win over 75 MPs, core of which is the backing from the DUP. Their 10 votes alone is not enough but reports in the FT today suggest some 50 of the nearly 70 Tory Eurosceptics who voted against it last week could change sides. The government would then need 15 Labour MPs, in addition to the five Labour and former opposition MPs that backed her last week.

My view is that there is a strong chance May pulls it off, if not at the third, then possible the fourth attempt (if she fails on Tuesday it could come back the following day as parliament will aim to decide before the EU council meets on Thursday and Friday to make a decision on any extension). If the government's plan is accepted, then I would be expecting to see a moderate relief rally in the GBP but further gains are contingent on the unanimous backing from all 27 European states.


So far, Europe have hinted that they would support a technical extension of a few months in order to facilitate the completion of the legislative process but if the PM's deal fails this becomes instantly more complicated and associated risks increase as per graphic above.



Managing market expectations...


Global equities had their best five-day performance since November last week despite the slew of downside surprises in multiple economic indicators. 



The reasoning behind this is mainly based upon two big factors:


  1. The Fed's dovish stance

  2. Progression on the China/US trade talks


In regards to the later, the South China Morning Post reported overnight that a Donald Trump-Xi Jinping meeting to end the trade war may be pushed back to June, according to sources. Although this kicks the can further down the road, I don't see this as surprising as Trump can strike the balanced tone of remaining firm but managing stock market stability in such a way that it leads to increased popularity when he starts to push for reappointment in 2020. I would be expecting more of this in coming weeks and for markets to take the developments in its stride without the exception of a complete breakdown in dialogue.


The other crucial factor here is the Fed and their decision this Wednesday night. FFR futures are pricing in a 98% probability that rates stay on hold, therefore, attention will be squarely on the latest Summary of Economic Projections (SEP) and by how much has the Bank's dovish view materialised into the updates in its official forecasts. 



My baseline view is the same as shared by the majority of economists on Wall Street, in that the Fed will revise the number of rate increases in 2019 to one not zero.


From a reaction point of view this does open up the prospect that given the extreme pricing of markets a dovish statement and only a moderate downgrade in the dot-plot could be perceived to be hawkish which may weigh on equities in the aftermath of the initial release.


Fundamentals and technicals keep the market bullish in oil...


Over the weekend the JMMC met in Azerbaijan to discuss the latest levels on OPEC+ compliance and potential actions that may be taken in the weeks/months to come. The most notable comment came from the de facto head of the group, Saudi Arabia, who said that the oil market is "nowhere near complete" and OPEC+ needs to "stay the course" until June.


Although Russia sounded a little more neutral the comments from Saudi carry weight and as long as their intention remains to support prices it's hard to see a big drop in prices without a severe repricing of demand expectations emanating from a renewed US/China trade fall out.



Interestingly, hedge funds' WTI net-long positions climbed 4% to 157,648 futures and options in the week ended March 12th, according to the CFTC. Longs rose for third consecutive week, while shorts dropped 7% during the period, according to Bloomberg.



TRADE IDEAS FROM THE TEAM


Sam North - Associate (@snorth19)


WTI crude futures...



Nasdaq 100 futures...



Gold futures...



Charlie Hyett - Junior Market Analyst (@CO_Hyett)



For a more in-depth briefing of our views you can access a recording of the session from this morning HERE.


Have a great week.


Anthony


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