 Good morning. Welcome to CMC markets on Friday, the 22nd of July and the week ahead beginning the 25th of July with me, Michael Hueson. It's certainly been a much cooler end to the week than it was at the beginning of the week. And we're having to digest a significant move by the European Central Bank on Thursday to unexpectedly high interest rates by 50 basis points was a bit of a surprise. I think there was widespread expectation that we were going to get 25 and there was certainly an awful lot of skepticism that the ECB will be able to come up with an anti fragmentation tool. In any event, Christine the guard came up with another acronym joy of joys TPI the short transmission protection instrument, which markets pose serious questions about with respect to whether or not it will be able to deal with what the ECB defined as unwarranted and disorderly markets dynamics. Governing council would decide on the eligibility of each member country on an individual basis for TPI implementation. I'm going to use TPI. I'm going, I'm not going to use transmission protection instrument because it's a bit of a mouthful. So TPI for short. We really did have to push all journalists had to push for details on how they tool would be used. The ECB insisted the tool could be used ex ante to deal with these unwarranted disorderly market dynamics. And that any country that used it would have to comply with the fiscal rules, fiscal and sustainability sound and sustainable macro policies, and an absence of severe macro imbalance. Begging the question, how on earth could Italy actually access this tool, given the fact that it's unlikely that if they were to conform to all of those. Why would they need it. The question that the ECB failed to address with this TPI was whether or not it would be legal to buy unlimited Italian bonds ex ante without the possibility of being it legally challenged in the German constitutional call. And consequently, after spiking up to one or two seventy five Euro dollar came back down again and now we can see from this chart here we've got three successive daily highs above one or two seventy five. So the ECB's hiked rates by 50 basis points and now back at zero the year of negative rates is over after eight years. And the latest PMI is this morning out of Germany and France are conveniently dropped into contraction territory. So the ECB is finally getting around to hiking. Just as the two biggest economies in Europe hit the buffers as we head into winter and have the risk that Nord Stream one having just reopened of the maintenance could well be cut off at the whim of Russian President Vladimir Putin. So that's essentially where we are equity markets have broadly been positive this week. When you actually look at it, I think in terms of the way the markets have performed. They're working on the premise that we're probably coming to the end of this particular central bank hiking cycle because one of the things that I've noted this week is a deterioration in some of the more noteworthy US economic data jobless claims being a case in point we've just gone back above two hundred and fifty thousand. I mean we've been rising for several weeks now so it's not really a surprise. But what we're starting to see is those claims numbers are starting to head in the wrong direction they're starting to head higher. The US labor market still looks pretty tight. We've got a Federal Reserve rate meeting coming up in the next week or so we've got US second quarter GDP. We've got US core PCE deflator. All of all of that is likely to point to the fact that the US economy is slowing the global economy is slowing. Commodity prices have been falling for several weeks now and even bond markets US bond markets are pointing to the fact that potentially interest rates could could be or could have already peaked. If we look at this US 10 year yield chart being a case in point we've got the makings and I've talked about this chart before. If those of you who've been regular listeners to these videos. There is there are signs that we are potentially and have potentially seen top. This could be could be a hadn't shoulders reversal starting to form on the US 10 year yield. We're not there yet, but what this chart is telling me and I think that's particularly important is that we've got the makings of a potential inverse head and shoulders and if we break below this low here, which is around about 274. If I just mouse over that there's about 274. So if we drop below 2.74% there is potential for us to drop quite sharply. Now at the moment there is an expectation that the Federal Reserve will do another 75 basis points. Next week we're also coming into US earning season as well. We've seen some mixed earnings numbers this week. We've obviously seen Tesla we've seen Netflix, Netflix numbers were slightly better than expected in terms of subscriber numbers they only lost 970,000 instead of 2 million. You know, and yet markets treated as if it was the beginning of the second coming. You know so that gives you an indication of how low the bar was when it comes to Netflix's numbers. Nonetheless, it's, I suppose, the perception is glass half full Tesla's numbers. Much better than expected profits revenues though, were below first their first quarter revenues and the fourth quarter of last year they were disappointing because of various supply chain disruptions that China factory shutdowns and what have you so that that affected the number of vehicles that were delivered which was only 250,000 compared to 310,000 in the previous quarter. So they're really going to need to go some to ramp up production over the course of the next six months to reach their annual target of 1.3 million they should get above a million but the big question is whether they'll reach their target 1.3. That's by the by I'm digressing a little bit. What is the ECB's decision to hike rates by 50 basis points, as at the same time as flash PM is going to contraction territory mean for euro dollar. Well, we talked about that already. The buyer still remains towards the downside. The inability to break above 10275 keeps the bias very much towards a return to parity and potentially towards my longer term target, which I talked about in previous videos of 0.9620. So this area down here 61.8 retracement. We can also see that despite the fact that we've popped higher this week by still remains lower while we're below this series of peaks here but also 10340 50 and the 50 day moving average. We've got a long way to go before we get out of this downtrend that we've been in since the beginning of the year. So that's essentially the outlook for euro dollar. The dollar is up today, modestly. And much I think will depend on how we play out with respect to euro dollar when the Federal Reserve concludes its meeting on Wednesday. Now, we're fairly certain that the Federal Reserve will be going by another 75 basis points. With the only question being what comes in September, whether we see 50 basis points and 75. Now, some of the hawkishness is likely to come out of future rate hike expectations. The further we move into Q3. The most recent US inflation numbers have jumped again. And that appears to be what the Federal Reserve is really reacting to 9.1% on the on the CPI measure the core prices once again, slept back so there is some evidence on the margin. The inflation is starting to peak. It's just that you're getting isolated pockets whereby it is bleeding through and it's hitting consumer incomes because essentially being felt very much in services in food and energy. And that's obviously where most people are going to feel it the most. Now we can expect to see the Fed lean into the narrative they need to get inflation under control, even if it pushes headline unemployment quite a bit higher, which should be broadly dollar supportive. However, there does appear to be a concern the Fed doesn't want to do it. So even when that CPI number came in at 9.1%, you saw the likes of Governor Waller and Saint Louis Fed President James Bullard push back on the possibility of 100 basis point rate hike. It's simply, I think, too risky to go that hard. That quickly we've seen 75 in July, we're going to see 75 this week. 100 basis points is by no means off the table, but I just think it's less probable, given some of the data that we're currently seeing. And another factor weighing on that particular narrative of 100 basis points is the fact that the University of Michigan five year inflation expectation survey survey fell back to a one year low the five year inflation survey fell back to one year low 2.8%. So some of the more aggressive inflation expectations are starting to get priced out. So brings us on to US second quarter GDP, which comes out the day after the Fed meeting. Now, there are those of you who will probably recall that I suggested that the US could be in a technical recession. And this week's this coming week's second quarter GDP numbers should give us some slightly more insight into that. In the first quarter, the US economy contracted by 1.6%. That was largely down to a big fall in net trade, which contributed to a minus 3.2% drag. And inventories also saw a 0.8% decline on the back of supply chain disruptions, as well as purchases that were brought forward into Q4, which resulted in that big inventory build up in Q1 which needed to be basically worked off. That isn't likely to be reported in the second quarter. And as such, we should see a little bit of a recovery in inventories, but it doesn't mean that we can expect to see a strong rebound. So I think the likelihood is we'll get a weak number of around about 0.5%. But certainly it will point to the fact that the US economy has stagnated in the first half and potentially even weakened a touch as well. So that also then brings us on to the core PCE deflator, which is the Fed's sort of headline. That's the way that it measures core inflation. Again here, that is likely to come in on the soft side. So that sort of sums up the US data that we've got coming out over the course of the next week or so. But more importantly, I think is really the messaging that comes out from the Federal Reserve. Can we expect to see more aggressive rate hikes in September? Obviously we've got the Jackson Hole meeting in between that. So we could get a change of narrative even in the aftermath of Powell's press conference next week. So that brings us pretty neatly to how equity markets are performing and have been performing over the course of the past week or so. It's a fairly decent rebound in the S&P. We're pushing up against that trend line resistance currently around about 4,000 at the moment. Now, the big question is I think as we go forward for me is how much more upside do we have? There is potential for us to head back to around about 4,200 in the short to medium term, but we still remain very much, I think, in the context of buying the dip, sort of selling the rally rather, when it comes to equity markets more broadly. It is notable we've seen a fairly decent rebound in US equity markets, but it's in the confines of the wider downtrend that we've been in pretty much all of this year so far. So we can see from the NASDAQ that even though the S&P's rebounded quite strongly, we're still below 12,913,000 on the NASDAQ. So any rebound in the S&P needs to be set in the context of similar rebounds in the Dow and the NASDAQ 100. And from this chart, we're not conclusively there yet. Things look even grimmer for the DAX. Again, we've seen a fairly decent rebound in the DAX this week, more a relief rally than I think anything else over the fact that Nord Stream 1 came back online. But there is no question that as we head into the winter, we've had EU Commission President Ursula von der Leyen basically asking EU members to ration gas supplies between now and winter. Not surprisingly, that's not gone down particularly well with countries like Italy and Spain, given the fact that it's more of a German problem than anything else. So the big question is, will that rationing actually take place? I think it's unlikely. And as a result, that's likely to weigh on the DAX. And we can certainly see while there is scope for a bit of a rebound, we are starting to run into a little bit of a resistance. And even if we do break above this 13,500 area, which at the moment has been capping the rallies, we've still got significant resistance in and around that trend line from the highs earlier this year. Firstly, 100 is about as interesting as watching paint dry. Again, fairly well supported at around about 7000, fairly well offered, anywhere just below 7400 in the short to medium term. I really don't expect that to change that much in the short to medium term. What has been interesting, however, is why Brent Crude has been behaving over the course of the past few days. The reaction highs have been getting lower, which suggests that commodity markets are starting to price demand slowdowns. And certainly Brent Crude does appear to be reflecting that we've got the 200 day moving average currently here. And obviously those lows that we saw back earlier this month of around about $96 a barrel. So that's worth keeping an eye out for. What is also worth keeping an eye, keeping a BDI on is copper. Because copper has continued to remain fairly well pressured over the course of the past few weeks, and that's no better illustrated in than in this chart here. Well, we could have hit a short term base on copper, but certainly what we've seen thus far does suggest that we do we are at risk of potentially further declines looking at the weekly chart. There's no evidence of a weekly reversal, which suggests that we could be on the cusp of more weakness before we see a rebound. In the longer term, I think copper still remains fairly well supported. It's just that the current slowdown that were currently. There's currently being priced in terms of copper suggesting that could be quite a bit more to come. Okay, so we've also got EU flash CPI for July later this week. It's already, it's already been confirmed at 8.6% in June earlier this week, the July numbers are likely to see it move closer to 9%. And while that's likely to vindicate the ECB raising the headline rates by 50 basis points, what it doesn't do is prevent a further slowing of the Eurozone economy. I think that more than anything, if inflation comes in even hotter for July, really highlights the conundrum that central banks are facing. It's not just the ECB. It's the Federal Reserve and it's the Bank of England as well, who are due to meet on August 4th. And again, they face a similar conundrum. Do they raise rates by 25 basis points? Or do they raise them by 50 basis points? The hunch is that they will probably go by 50, if only because the ECB did something similar. But again, if you look at this, this daily chart here, we're faced with a similar problem when it comes to cable. Decent resistance at around about 120 and a half, 120, 50. That is the key resistance on the top side. If we do break above that, then we just run into this area of resistance where we've got the 50 day moving average in the downtrend line resistance from the peaks that we saw in February. So we've got ECB officials out, as I speak, talking about the September rate hike, potentially being 25 and not 50, but September is a long way away. And given the fact that the ECB have formally dropped their forward guidance and saying that they're going to be basically raising or setting rates on a meeting by meeting basis, suggests that you're not going to get any more clues about what the ECB is going to do from here on in. You're just going to have to read the data and hopefully call it right. Ultimately, whatever the ECB decide to do, it's going to be difficult to stop the euro from heading back towards parity in the short to medium term. Also, big week for earnings. So I know a lot of you have been waiting to hear what I've got to say about that. And really, I think that's going to be the big test going forward. We've got a number of key numbers coming out. We've got the UK banks, we've got Lloyds Banking Group, we've got Barclays, we've got NatWest Group all reporting next week. We've also got Shell in the aftermath of the windfall tax, energy price, excess profits levy, whatever you want to call it. What's also notable is the way Shell share price has declined since that levy was announced, but also as a result of the decline in the oil price since those peaks fall the way back earlier this year. So, still one of the big winners this year has been Shell, still had a fairly good 2022. The big question, I think, is, can it continue to outperform? Earlier this month, Shell shares received a bit of a boost of company announced it was revising up its oil and gas assets on the back of higher refining margins. So, it should generate higher returns for Q2. Improvements in these margins should see an improvement in profits of around about a billion dollars. So, we should see a fairly decent quarter for Shell in Q2, just as a reminder, underlying profits in Q1 came in at 9.1 billion, which was a 43% increase on the numbers for Q4 and also beat expectations of 8.2 billion, which was the best quarterly performance in over a decade. They did announce they were taking a $3.9 billion charge in relation to their Russian assets, but they also made an awful lot of money from their trading division, which did struggle in Q4. So, the big level, I think, with respect to Shell is, if we do get a little bit of a sell-off, do we hold above the 200-day moving average and do we hold above the trend line support from the lows back in July last year? At the moment, the outlook for Shell still looks fairly promising share price-wise. We're still in the broader uptrend that we've been in for quite some time. In terms of banking, banking is going to be tricky because obviously anything banking-related, whether it be Lloyds, whether it be Barclays, whether it be NatWest, is going to be very domestic economy-orientated. And I think what we can glean from the recent numbers from the US banks is that they are now setting aside much higher provisions, loan loss provisions for credit impairments as a consequence of higher inflation. So, that also explains why Lloyds Banking Group shares have really underperformed relative to their counterparts and underperformed quite a bit so far this year. That being said, they haven't really done that much. They've traded 43p, 48p. They still pay a fairly decent dividend and they're a very well-capitalized bank. So, it's still a mystery to me as to why they're valued so poorly. Looking at Barclays, it's a slightly different picture. They have a much bigger investment banking arm. And as a consequence, that's why even though we've seen a big drop in the share price for Barclays, nonetheless relative to where it came from back in 2020, it still performed much better relative to, say, for example, Lloyds and NatWest. So, the Corporate Investment Bank has been a little bit of an underperformer. But overall, despite the cost of living squeezes, little evidence of an increase in credit card arrears that could change. So, interesting to see how those numbers play out when they are released on the 28th of July. Going to skip NatWest because essentially there's nothing there that I haven't really covered already with Barclays and Lloyds. What will be interesting, however, is mortgage lending. Has there been a slowdown in mortgage lending in Q2 as a consequence of the rise in the cost of living? Interesting one I think is Unilever, given the fact that they dodged a bullet when GSK rejected their bid for what is now known as Haleon. And that launched on the stock market this week to much fun fair, but a little bit of a disappointment as the shares dropped the first two days of trading. And as I say, sometimes in life timing is everything and Unilever CEO Alan Joke must be signing us, you know, must be leaving aside relief that GSK didn't accept his £50 billion bid for Haleon because it's now worth £30 billion. Anyway, so Unilever's numbers should be interesting now that they've got Nelson Peltz on the board who was behind the turnaround in Proctor & Gamble. We could get some information on perhaps whether or not Unilever is looking to perhaps sell off some of its less profitable parts of the business. Certainly they could do worse than to get rid of Ben and Jerry's because there does appear to be a little bit of management clash there. And I'm not really sure that Ben and Jerry's increasingly political approach is really going to help them if you choose to intervene in politics. Because you run the risk of polarizing or putting off potentially quite a good part of your customer base. But anyway, that's not really a discussion for this particular forum. In terms of tech, it's a big week. We've got Apple, we've got meta platforms, we've got Alphabet. Alphabet and meta will be very interesting given the fact that Snap posted a big earnings miss last night on Thursday with respect to its numbers, a big drop in advertising. And the last time Snap did something like that, it was a bit of a canary in the coal mine for a bit of a slowdown more broadly for the wider industry. So Meta's numbers will be particularly interesting in terms of Facebook advertising as well Alphabet, Google, YouTube advertising revenues and what have you. Google Alphabet is out on the 26th of July. Meta platforms is out on the 27th of July. We've also got Microsoft on the 26th of July. And we've got Apple on the 28th of July. So let's have a quick look at Apple, because that's proved to be fairly resilient over the course of the past few weeks, seen a fairly decent rebound back towards to shy of $160. And Apple has surprised the markets in the past few days by announcing it was planning on slowing, hiring and spending adding into 2023, but it's not been alone in that. Now an increasing, you know, an increasing uncertain economic outlook is always bound to prompt a little bit of a reassessment of companies economic priorities. And they haven't said they're stopping hiring. I said they're slowing hiring, but it's interesting. It'll be interesting to see whether or not we can get back through $160. So at its last earnings update, Apple did say that various supply chain disruptions COVID in raw shutdowns in China, those problems could cost it as much as $8 billion in Q3. So it'll be interesting to see whether or not it is as much as that or whether or not it's even more. Certainly sales of iPhones in Q2 are likely to be a key bell, whether in terms of whether or not there's been as big drop off in demand. Services revenue just came in shy of $20 billion in Q2. Can they get above Q, can they get above $20 billion in Q3? As has been normal for most of the last two years, Apple didn't offer any guidance for Q3. However, market expectations for Q3 offer revenues of $83 billion, profits of $1.15 a share. I'm going to finish up with Microsoft because that's always a fairly, always a fairly good bell weather more broadly because it covers a multitude of business areas. So let's go to Microsoft and have a quick look at that. And again, does appear to be finding a little bit of a base there, Microsoft, in terms of the recent sell-off that we've seen in the share price. And we've also got Amazon. My primary interest, I think in both of these, is in terms of Amazon, have the costs gone up? Or are they going to start cutting costs in terms of they hired too many staff and now they need to get rid of them? So the big level on Amazon's share price is this peak here back in June, which is around about $129. Now that they've done their stock split, shares are more affordable. We have seen a bit of a rebound. And the big question now is, as we look at the next area of resistance is, it's this series of lows through here, which are likely to act as resistance on the way back. So looking at Amazon, profits are expected to come in at a fairly modest $0.16 a share. So let's just put that to one side. For Microsoft, we've got, I think the big thing for me is personal computing. Sales of Windows 11, sales of Xbox, X's and Xbox S's. They expect to see record revenues of $52.4 billion when they updated the market in Q3. They revised that lower earlier this month to $51.94 billion. So there's still a record number. So, you know, it's all about tempering expectations. It's also about where the bar is. And an awful lot of the reason I think we could see a little bit of a miss on some of these revenues from the big tech companies is the strong dollar. We've heard it from Netflix. They've talked about it seeing as they get 60% of their earnings from overseas. Apple, Microsoft, Amazon, Alphabet, they're all potentially going to have the same problem. The strength of the dollar, how much of a currency effect is going to lead into their incomes. It's probably not going to be particularly notable in the wider scheme of things in terms of their overall revenues, but I think there will be an effect. So be interested to see whether or not we see a significant rebound back to 280 when it comes to the Microsoft share price. So I think pretty much I've gone on for way too long. Let's wind up this week and look forward to what should be a very interesting week in terms of central bank. The central bank conversation over future inflation expectations and whether or not the Fed message that we get next week is for is a hawkish one or whether they start to dial back a hawkish narrative and manage that those rate expectations slightly lower. Anyway, that's it for this week. Thank you very much for listening. This is Michael Houston talking to you from CMC Markets.