 Good morning, welcome to CMC markets on Friday the 11th of November and this quick look at the week ahead beginning the 14th of November with me, Michael Euston. The last few days have seen a significant change in sentiment. It sort of started towards the end of last week actually, a big China induced rally on reports that the Chinese government was looking at potentially looking at a roadmap for an unlocking of the economy and while I think it's entirely reasonable to be slightly skeptical about the imminent reopening of the Chinese economy, markets are certainly latched on to that with a big rally in the likes of the Hang Seng and the Hong Kong H shares index. So certainly I think it makes sense for the Chinese government to be wargaming a scenario where you're going to see an unlocking but I still think it's highly unlikely that we'll see a significant reopening much before the end of first quarter of next year. And why do I think that? Well, it's fairly simple really, I think if you're running a zero COVID policy and infection rates are continuing to rise across China, you've got rising infections in places like Hong Kong, Guangdong, Shenzhou. Then the scope for an imminent relaxation is fairly limited, nonetheless markets are running with it. And ultimately earlier today, we've seen reports that the Chinese government is looking at relaxing quarantine rules modestly, I would say very modestly indeed. Certainly I think given by the market reaction, you'd think that there'd be an imminent, there'd be a significant relaxation over the course of the next two or three months. That's not going to happen. And I think once markets come to terms with that and the fact that we're probably not going to get a significant pickup in economic activity in China much before the end of Q1, things will settle down a bit. But that's not the only thing that markets have latched onto this week. Now that the mid-term elections are out of the way, the likelihood is that the Republicans will at least gain control of one house, which will effectively block any further legislation from the Democrats, essentially making Joe Biden a lame duck president, well, slightly more of a lame duck president than he already is. So from that point of view, that's potentially dollar negative, it's certainly less inflationary if the Democrats can't embark on significant stimulus spending over the course of the rest of his term. But I think the real catalyst for the rally, well, I think we all know what the real catalyst for the rally over the last 24 hours has been. There's that US CPI number for October, which rose by 7.7%. It's lowest level since January, prompting a huge relief rally in stocks, bonds, as well as a sharp sell-off in the US dollar. And I think that more than anything is the significant factor that could well drive equity markets through the rest of this year. The rally was also given added by at least three Fed speakers, Dallas Fed President Laurie Logan, Philadelphia Fed President Patrick Harker, and San Francisco Fed President Mary Daley, who all indicated that a slower pace of rate hikes might be appropriate. So essentially what they're saying is that there's going to be no more 75 basis points rate hikes going forward, at least will at least get a 50 basis point rate hike in December. And certainly I think if inflation numbers continue to come on the softer side of expectations, we could see a ratchet down to 25 basis points as we head into next year. And I think while these Fed speakers were at pains to point out that 50 basis points is still a sizable rate increase, it is. So I think the fact that US inflation has been falling and the headline rate has been falling since June. I think if you look at a cursory look at the data, we'll tell you that. The fact that core prices also dropped quite sharply was a huge relief, I think, to an awful lot of people. And you can certainly see that borne out in the way that US bond markets reacted yesterday. And I think from a technical point of view, this move lower was quite significant in the context of the price action last few weeks. The break below these reaction lows here on the 10-year yield was, I think, very significant indeed. The fact that we broke below 389, 390 by 10 basis points suggests that this move lower in yields could have legs. If we look at the two-year, the move is similarly sharp in terms of the move lower. Let's just look at six months because I think that gives us a better indication of where we are. Having said that, what we haven't done is taken out the reaction low from October. What was quite interesting, though, is if we look at a one-year chart, that's a bearish reversal, a key day or a key week reversal. So that gives us hope that we've potentially seen a short-term top in US yields. Essentially, that would then potentially argue for further dollar declines. And if we look at the dollar index, we can see that. I showed you this chart last week that we are trending lower. Could we see a potential peak in the dollar? Certainly that does appear to be playing out in the way the dollar index has been trading. And what was particularly notable was how Dollar Yen reacted this week. We broke below 145, which was the initial low on the second bout of intervention from the 21st of October. The second bout of intervention drove the dollar down to 145.10. We've rallied back, weren't able to break back above 150. We've since broken below the 50-day moving average, which was also the 145 level and retested 140. So that's significant. That's significant for a number of reasons. The fact that we've broken below the 50-day moving average, the fact that we've broken below the 27th of October lows suggests momentum is now shifting away from the dollar. And if it's shifting away from the dollar, that suggests yields are going to come down, should be positive for risk over the course of the rest of this year. The only thing that would negate that is if Dollar Yen rallies back towards 145 and breaks above it. But the fact that we've seen these technical breaks on the Dollar Yen, but also the dollar index has started to ratchet lower, suggests that we could be in for a period of dollar weakness as we head in to year end. And that's potentially a good thing when it comes to inflation here in the UK, but also in Europe as well, which is still rising. I think we look at inflation and we obsess a little bit about the US, and US inflation has been falling. And a part of the reason for that could be the rise in the dollar. Now the dollar is going to start to weaken. We could start to see a slowdown in the pace of inflation here in Europe and the UK, which is continuing to rise next week. UK inflation is predicted to rise from 10.1% to 10.5%. And I think that's going to be one of the key indicators in terms of inflation for the UK that's likely to drag on the UK economy in the fourth quarter. Because today the latest third quarter GDP numbers out of the UK showed a contraction of minus 0.2%. Slightly better than expected, but it's really, I think, a small victory when you consider that we were expecting a contraction of minus 0.5%. Some of the data for September was slightly better than expected. That's a positive, but if you think that things aren't going to get any worse between now and the end of the fourth quarter, then I think you're going to be largely disappointed. That being said, that the main focus as we look ahead to next week, and away from the big jump that we've seen as a consequence of US CPI, is going to be very much on the UK economy, the UK mini-budget on the 17th of November, UK CPI on the 16th of November, and obviously wages and unemployment on the 15th of November. We've also got Chinese retail sales, US retail sales, and UK retail sales as well. So an awful lot of UK data coming out, how that affects the Chancellor's mini-budget on Thursday is probably not going to make too much of a difference. We all know the data is going to be pretty poor when it comes to the UK consumer. Consequently, the budget is really, I think, going to make any attempted recovery in the UK economy that much more difficult. So let's look at the technicals because we've looked at the dollar index. Let's look at Euro dollar. Euro dollar continued in this uptrend. It's broken above the September highs of 102, which suggests that potentially we could be heading back to 10340. Now that 10340 level is a fairly decent resistance level because it acted as support on the way down on this move down through here, and it's also acted as decent resistance on the move back down to the lows that we saw at 9540. So the wider question is, are we going to test the 200-day moving average? Well, certainly I think if you look at it on the basis of the way the dollar index is traded, there's a fairly decent chance that we could retest this 10340 level. The big question is, have we seen the lows in Euro dollar? And I think the only way to answer that question is to see how the Euro reacts around about 10340. So certainly think we'll see a test of that. The big question is how we react around that, if and when we get there. Similar sort of story for Cable. We pretty much know that the data next week is not going to be positive, but it's not really about that. It's really about what US yields do, how US data performs, and we do have US retail sales next week. Weekly jobless claims are still averaging around about 220,000. So there's certainly nothing in the US labor market at the moment to concern anyone about where the US economy is going. But what we have seen is a breakout in Cable. Now, we want to see a break above 117.40.50. We could well be seeing that. Certainly I think there is potential for Cable to move higher now, certainly towards the 200-day moving average. Maybe we won't get that far. I think the big level is really around about 119.80. I think that round number, it was a fairly decent support on the way down. Yeah, we did sort of mess around a little bit around it in and around July and August, but ultimately on previous tests lower, the 119.51.20 area has generally tended to be a fairly decent area of support or resistance in equal measure, which is essentially what I've left in there. Yeah, it's a bit messy around there, but if you take it all the way back to 2019, it was a decent support area. It was a fairly decent support area there. Obviously, that was the COVID crash that we saw back in 2020. And then we saw a decent rebound from here before we started to miss about between 119.50 and 117.50 through here. So that's going to be a fairly significant barrier in the short to medium term, but I still think there's a fairly decent chance we can test it just on the basis of the fact that the Bank of England is probably going to have to do 50 basis points in December anyway, just to match the Fed. So we've certainly got at least another 50 to 100 basis points baked in. The big question is, have we got any more rate hikes over and above beyond that? Euro sterling, still boring, found a fairly decent resistance above 88.20. I still think we're in a range here. Potential bias towards the downside, certainly the ECB has started to sound a little bit more hawkish, but overall there's nothing in this chart to suggest that we won't continue to range trade in the way we've been range trading over the course of the past few weeks and months. Interesting dynamic, however, on gold, which suggests and supports my hypothesis of a weaker dollar. This break above these peaks at 1730 suggests that we put in a double bottom or a triple bottom on gold. Now, if that's the case, then we're likely to see a test of the 200-day moving average on gold and potentially higher. Looking at 1617 to 1729, that's 110. So we can then extrapolate that up from 1730 to 1840. So certainly a minimum price objective on this move higher in gold suggests we could see a test and a modest break of the 200-day moving average on gold. If you believe as I do that this is a break of a potential double or triple base, which suggests that on a minimum price objective, if you measure this on a measured move basis, then we should see a similar move up towards 1810-1820, which suggests very much a weaker dollar over the course of the next few months, which would support then potentially lower dollar yen, break of 140 would target 135-130, euro dollar back towards 104-105, cable back towards 120. We'll see whether or not that plays out. Of course, with all this chatter about a reopening of the Chinese economy, that is pushing oil prices and commodity prices up. So inflation is likely to remain sticky for quite some time. One thing I would say about this particular Brent crude chart is that it continues to find the air a little bit thin above $100 a barrel. So it'll be interesting to see whether or not the current move that we've seen over the past couple of days is sustainable. There is a big barrier at around about $100 a barrel. We certainly won't want to see it much above that, but that would suggest that while inflation is starting to come down, it's not going to come down quickly, certainly not in the context of where energy prices are, even though natural gas prices are continuing to fall back as a consequence of the recent warm weather. If we look at UK natural gas prices, we are still falling, which is a very, very good thing when it comes to potential another energy price cap in March next year. So let's shift our focus back to the mini-budget. We already know that UK wages are trending at a much lower rate than inflation around about 5%. So the income squeeze is likely to continue for quite some time to come. Average weekly earnings in August rose to 6%, excluding bonuses 5.4%. Inflation, CPI inflation is expected to rise from 10.1% to 10.5%. That's just eye-wateringly high. That's in real terms a 5% decline in real wages. That will keep the pressure on the Bank of England to hike aggressively in December. Food prices are likely to be the key driver behind that. Certainly, grocery price inflation is already around about 14% year on year. So the squeezing incomes is very, very real, which begs the question, what to expect from this week's mini-budget? We expect to get the final details of that on Thursday. The various spending cuts and tax rises. The new government is set to remark when it comes to addressing the so-called 40 billion pounds black hole in the public finances. Right. Okay. I'm going to get my soapbox here. Apparently, there's a black hole in the public finances because of the big jump that we've seen in bond yields rising interest rate costs as a result of the mini-budget at the end of September. Well, sorry, but I mean interest rate costs are now back down to where they were at the beginning of September, certainly in the case of the 10-year, the UK 10-year yield. The pound is higher than when it was prior to that mini-budget. So, you know, what fiscal emergency are we looking to address here? Since the change of leadership at the top of government, these concerns have abated about the sustainability of the UK's public finances. If you look at our debt-to-GDP ratio, compared to, say, for example, France, it's way lower, significantly lower. Germany is spending probably three times as much as we are on bailing out its households and its energy sector over the course of the next few months. So, I think the concern is that the framing of the discussion about sustainability of public finances hasn't shifted at all in terms of convincing the markets that future spending plans will be properly scrutinised. You then have to offset with the damage that any measures will do to the economy in the round. So, you can talk about a black hole in the public finances, but what is it premised on? Is it premised on a host of forced assumptions that aren't likely to take place? The market didn't care when the market was, you know, the market didn't care when the government was spending 350 billion quid on various COVID support measures in the previous fiscal year, yet we're supposed to believe that suddenly a huge concern about a 40 billion black hole, the government suddenly needs to peg. Yes, interest rates are higher, but they're higher pretty much across the board. They're higher in the US, they're higher in Germany. I'm not saying that the government shouldn't be responsible about the public finance, but it doesn't need to embark on a host of spending cuts on big infrastructure projects which is sorely needed if they are serious about levelling up. They simply have to convince the markets that they have a credible long-term economic plan that they can implement over a five or 10-year period that rather than impose a plan that no other country in Europe is pursuing. You know, it just makes no sense whatsoever. All they will succeed in doing is making any recession more prolonged and more entrenched. So, you know, the hope is that the economics, Trump's, the politics, ultimately this government isn't going to win the next election. So really, it's about you might as well try and do what's best for the country rather than basically look at a self-serving budget that's probably not going to achieve anything anyway, ran over. Let's just move that out of the way and let's move on. UK retail sales for October, well, we've already seen two months of declines, minus 1.7 in August, 1.4% in September. Could we see an improvement in October? Possibly, but with the new energy price cap kicking in in October, it's not hard to see that consumers will continue to rain back spending going forward. The September numbers were weighed down by the extra bank holiday due to the funeral of Queen Elizabeth II. This week's October numbers could see an improvement, but with consumer confidence already low and this close to Christmas, I would imagine that consumers will probably hold back until November, December when they'll start to cautiously unlock their purse strings as we head towards the end of the year. US retail sales been much more resilient than UK ones. The spike seen in natural gas prices in the US has been nothing compared to those being seen in the UK and Europe, so that basically means the US consumer hasn't been anywhere near as squeezed as here in the UK. What has been notable about the rallies that we've seen this week in equity markets is thus far we haven't actually taken out this resistance level on the Nasdaq. So what we've seen strong rallies in the likes of DAX, the FTSE 100, back to close to recent range highs, we've seen a rally off the lows in the Nasdaq. So while people talk about the best rebound since April 2020 for the Nasdaq, it needs to be said in the context of where markets are right now and there's still just above the lows that we saw earlier this year, that 10,500 level on the Nasdaq. So I think for the rebound to be sustainable, we really need to see a move through 12,000 and a test of this trend line resistance from the highs this year. Similarly, S&P 500, we have broken higher, but again, we're below the 50 day moving average and we're below the trend line resistance from the peaks this year. So you need to put the rally that we've seen in US markets in context of how close we are to the recent lows. Whereas if you look at the DAX, we could well retest 15,000 very easily and these previous peaks all the way back in June, 14,700 and obviously this 15,000 area here, which I drawn in, which was previous support through 2021. So certainly, I think given the way we've broken above the 200 day moving average on the DAX, there is scope for further gains in the DAX. Similarly, FTSE 100, we've broken above the 200 day moving average as well. Now, that's not as significant as say, for example, the move in the DAX, but it is significant, nonetheless. We've retested, could well retest the highs back in September, 7,500. In the round, the FTSE 100 year to date has probably performed better than every other major index. It hasn't lost any ground at all on one of the main reasons for that is obviously performance of oil and gas stocks, but I digress and the more defensive areas of the market. What has been particularly interesting though, if you look at the Hong Kong, the Hang Seng, we've seen a bullish weekly reversal in the NASDAQ right there. Now, yes, we did see one here all the way back here, and it didn't last very long. But if you look at how low the NASDAQ has come from, there's certainly potential for a fairly decent rebound, and we are down significantly year to date. So, there's certainly scope for a retest of 18,000, these peaks back in October, and even then, we'd still be well down on the year. The eight shares index, similarly, seen some really strong gains over the course of the past few days, and similarly, posted weekly reversals. As I say, you can't read too much into that because, again, here, we saw a very strong reversal, and it barely lasted two or three weeks. We're back down here again. Hopefully, this time is different. One of the more positive factors at play here is that if we do break above 6,000, we could see a decent rally in the eight shares index as well. On the earnings front, not really too much to report. We've got Walmart and Target, Walmart on the 15th of November with their Q3 numbers, Target with their Q3 numbers. They have warned on higher costs for Q3. Walmart said it expects to see revenues of $147.55 billion and profits of $1.31 a share on slightly lower operating margins of 3.6%. Also did also announce that it was making Paramount Plus available to its Walmart Plus subscribers from September to further take the flight to Amazon in the battle for annual monthly subscription services. You could see a little bit of a boost there. $147.55 billion, that's down from $152.86 billion in Q2. If we look at the Walmart share price, we look at US retail sales, you can see that Walmart has continued to punch above its weight when it comes to retail and has been slowly edging higher from the lows that we saw back in May. Target similarly says it still sees full revenue growth in the loads of mid-single digits. So again, they've been performing fairly well. Another one to keep an eye out for is NVIDIA, ChipMaker, which even though we've seen a fairly decent rebound in the NASDAQ, is still very much in the downtrend that it's been in pretty much for most of this year. So there's certainly potential for further gains and move back to the 200-day moving average. And this series of peaks all the way through here in July of $195. We've certainly seen a fairly decent rebound over the course of the past few days and we can see that played out in this chart here. In the UK, we've got numbers from Vodafone, we've got numbers from Burberry. Optimistic on Burberry, given some of the numbers that we've seen out from its peers, Louis Vuitton, Richemont and what have you, luxury has been a fairly resilient sector when it comes to earnings numbers, first-half earnings numbers from Burberry, first-half earnings numbers from Vodafone. There does appear to be some evidence of a bit of a rebound in the Vodafone share price, but ultimately it's still very much a story of how is it able to get its debt levels down while improving its margins in what is a very, very competitive telecoms market. Okay, so that's pretty much it for this week, ladies and gentlemen. As I say, the key thing to keep an eye out for next week is going to be the mini-budget and how much pain the Chancellor of Exchequer decides to impose by way of stealth taxes on not only us as taxpayers, but also businesses as well. So that's it for this week. Thank you very much for listening. This is Michael Hueson talking to you from CMC Marcus.