 Hello and welcome to CMC Markets on Friday the 16th of August and this quick look at the week ahead beginning the 19th of August and it's been a rather turbulent week for global equity markets. We've seen big falls, big one day falls and we've also seen significant rebounds. You can certainly see that borne out in this S&P 500 chart that I have on the screen in front of me right now and at the moment we're experiencing a little bit of a rebound after the big falls that we saw on Wednesday. So what's caused this volatility? Well it's certainly been driven largely by the bond market, particularly inversions in the yield curve for UK debt, UK guilts and US government debt and particularly big falls in the value of the long-term government debt, particularly the US 30 year which dropped below the 2% level for the first time ever. We are seeing a little bit of a rebound in that today, hence the rebound that we're seeing in equity markets. I want to say a rebound in that I'm meaning a rebound in yields and not a rebound in prices. So we're seeing a little bit of a rebound in equity markets but there is no question that the narrative has changed a little bit over the course of the past few days. With respect to some of the geopolitical concerns which are still valid, obviously events in Hong Kong, US China trade, the threat of escalation we have seen President Trump announce delays to some of the new tariffs on Chinese goods into the US but nonetheless it still means that there's going to be more Chinese goods tariffed from the 1st of September than was the case on the 1st of August so and while some of these tariffs have been delayed till the 15th of December the relationship shall we say between the US administration and China has become a little bit more strained of late but it's really the movements in the your curve that I think have really dominated headlines over the course of the past few days and as such the question facing investors is whether the inversions we're seeing is because of the risks of an approaching recession which based on recent US data looks unlikely or because interest rates are so low and in a lot of cases negative that investors are not only looking for yield anywhere they can find it or whether they're looking out to price out recession risk particularly in areas like Europe and China I would argue there's an element of deflation risk taking place as well I think there's an element of all three in terms of what's driving bomb prices higher and what's driving bond yields lower but certainly I think there's also a case of a hunt for yield and if you look at US yields you look at UK yields they're one of the few areas of the bond market that is actually still in positive territory we've gone in space of the past week from 14 trillion dollars of negative yielding bonds to 16 trillion dollars of negative yielding bonds so I think there is an element of investors looking for a haven against deflation so what does that mean for equity markets and what to the point what does it mean for central banks because certainly in the context of what we've seen this week German economic data continues to look pretty weak and in the context of the week ahead we've got some important PMIs coming out as well as the latest German IFO business climate survey as well but we've also got increased speculation that the European Central Bank is likely to do a much bigger stimulus package than markets of potentially pricing in when they meet next month we had the governor of the Bank of Finland Oli Ren talk about a substantive stimulus package the only problem with that narrative is that with interest rates already at record lows how much more can the ECB actually do without causing permanent damage to the European banking system and you've seen that really played out in the share price moves that we've been seeing in Deutsche Bank we can see that here we are now pretty much near all-time lows and we closed at a record daily close for Deutsche Bank earlier this week the euro's also taken a substantial hit on the back of that dovish narrative from Oli Ren and you can see that here in this in this euro dollar chart in front of me now I think there's a decent possibility with respect to euro dollar that we can retest the lows of earlier this year at the beginning of the month of one ten twenty particularly if you look at the if you look at the the direction of travel for US economic data but the biggest event next week and I think it's going to be an event that's going to be I think it's going to generate an awful lot of Twitter narrative from President Trump is not only the latest Fed minutes which are due out on the 21st of August and given the fact that the US central bank cut interest rates by 25 basis points in July the first cut since 2008 and ending a period of rising interest rates that first started in December 2015 I think the minutes are going to point to probably a fairly healthy level of debate as to why the Fed felt it necessary to cut rates by 25 basis points why there was the level of dissent around that interest rate decision to cut because that's not forget we had two dissenters in the form of Eric Rosengren and Esther George who basically dissented to that decision to reduce interest rates by 25 basis points but since then we've had James Bullard who initially voted for a rate cut who was the front runner for the rate cut saying that it's unlikely that the Fed sees the need to cut rates further well that's going to make for an interesting discussion and a two and fro between President Trump and Jay Powell who President Trump has labeled clueless when it comes to monetary policy and we have the Jackson Hole annual symposium also next week on the 22nd of August and it's going to be I think it's going to be topical in more ways than one and certainly going to drive the direction of the dollar because it's it's about challenges for monetary policy and an environment of increasingly negative rates and that's particularly topical given that we've seen bond yields move evermore into negative territory so at the beginning of this year the challenge was about to house a normalized policy but that's now shifted to the topic of what other tools central banks have in their locker to come up to deliver with soft landings for those economies that are sitting on the cost and on the cusp of outright stagnation and in some cases recession and for me ultimately there's very little central bankers can do China is exporting deflation if you look at the PPI numbers out of China for most of 2018 they were trending at around about four four and a half percent this year they're trending well below one percent so that's just quite a significant drop-off in China factory gate prices and on the back of a devaluing Chinese one we can see that with this chart here and we have retested the breakout point of 698 but the direction of travel is quite clear with respect to this horizontal support and resistance line here while we remain above 698 against the Chinese one then the direction of travel is for a weaker one and if we continue to weaken over the course of the next few days and weeks that is going to put potentially downward pressure on equity markets and it's going to potentially as well push a deflationary wave out across the globe particularly if Chinese factory gate prices continue to remain in negative territory and that's what they did earlier this week so let's look at the key levels on various equity markets stacks earlier this week posted its lowest level since March and that's going to be a key support level going forward so let's put that in so that we can determine where that level is I would suggest it's around about 11,400 it's not it's 11,250 my mistake so you've got those lows in March there as a very very key area of support and then below that obviously the 11,000 level which was the January lows so we've seen a bit of a rebound we need to get back above this 200 day moving average here 11,250 on the downside 11,000 around about 680 11,700 on the upside is a resistance there with respect to the S&P this current rebound really needs to take us back above it 2,960 we've been back to it once earlier this week we've come aggressively lower off it bear in mind that we've got the 200 day moving average around about 2,800 but certainly I think we're going to continue to chop around in the range particularly in such a big week for the US central bank the Federal Reserve all eyes will be on Jackson Hole and the Fed minutes so the Jackson Hole symposium starts on the 22nd the Fed minutes come out on the 21st we've also got some very big data out of Europe the France and Germany flash manufacturing and services PMIs for August which are due out they're not to put too fine a point not to put too fine a point on it the most recent manufacturing numbers are poor they're like they're unlikely to improve so the big question continues to be around services will the drag on manufacturing start to bleed into services thus far that hasn't been the case particularly in Germany but that doesn't necessarily mean that they will continue we've also got the German IFO business climate survey and the last one was a pretty sobering assessment of the German economy at the last survey the president of the IFO Clemens Foost said that the latest service or activity dropped to a six-year low points into a German recession we've seen Q2 GDP in Germany contract by 0.1 percent the direction of travel for Q3 points to a further contraction in Q3 and that would I think really bear down on the euro dollar we talked about that earlier in the video keep an eye on the very key levels there 110 20 on the downside 111 70 on the top side we've also got the latest CPI numbers out of the European Union let's not forget ECB monetary policy is already extraordinarily accommodative yields are in negative territory the deposit rate is minus 0.4 German two-year yields are already minus 0.8 and closer to one minus one percent than they are to the actual deposit rate itself so the markets are already pricing in a 40 basis point rate cut by the ECB that for me even if they do that it's only going to exacerbate the stresses and the strains in the European banking sector another key arbiter of risk is gold I've talked about that at great length and I've written articles on it which you can find on the website but certainly in the in the context of the recent up-moving gold prices have a look at this low here 1480 that was the low that we saw on Tuesday we also saw a multi-year high on Tuesday so 1530 on the top side 1480 on the downside I would suggest that if we get a break lower we could well see further losses towards 1440 but while 1480 holds then it's very much a sell-the-rally type of attitude that you need to take with respect to equity markets in general these key breakouts in the Chinese one and the gold price are very key arbiters to the direction of travel for equity markets going forward while they remain above key support levels the one and gold then it's very much a sell-the-rally mentality I think as far as equity markets are concerned on the earnings front we also have some key announcements from person in the UK House Builder on the 20th of August they they ship they've got their first half earnings coming out and in the case of the US consumer we've seen some decent numbers from Walmart and some awful numbers from Macy's we've got targets Q2 Q2 numbers coming out on the 21st and again they can be a fairly decent bellwether of the US economy we've seen some decent retail sales numbers out of the US fairly decent ones out of the UK that's helped the pound we do appear to be getting a little bit of a rebound in the pound against the dollar if we break above 122 30 we could get a bit of a run to the upside but what I'm encouraged with respect to euro sterling we could actually see further declines there after some very strong gains this weekly reversal here if confirmed could see a very strong sterling rally against the euro so be prepared for a bit of a sterling short short squeeze and potential sterling gains over the course of the next week or so so that's it for this week a bit of a longer video than normal if you want to keep keep tabs on the news and analysis and the various articles that we've written with respect to the markets and in particular this article that I've written on bond yield inversions it's quite useful in terms of whether or not we think that there will be a recession or whether there won't be one or whether investors are just hunting for yield keep an eye on the news and analysis section because that's a useful source of what I'm thinking but also what my colleague David is thinking as well so that's it for this week thank you very much for listening to Michael Houston talking to you from CMC markets