 Good morning. Welcome to CMC markets on Friday the 30th of June and this quick look at the week ahead beginning the 3rd of July with me Michael Houston. It's been a fairly patchy week for equity markets. We've seen swings higher and lower as we come to the end of the week, the month, the quarter and the half year. And I think if you asked me at the beginning of the year what I thought equity markets were going to do in 2023, I think my answer would have been that ultimately I expected European markets to outperform US markets and to a certain extent that has been true if you ignore the NASDAQ and I've written about that in a piece on the website and news and analysis as H1 draws to a close what next for equity markets and certainly I think that will be a theme that I'm returning to and will return to over the course of the next few weeks. But ultimately I think if we look back at the last call to the last six months, it has by and large been a fairly positive period for stocks. Yes, there have been some setbacks. Obviously the volatility that we saw in March, the big declines on the back of the regional banking crisis in the US caused a bit of a sell-off. Weakness in energy prices has meant that the FTSE 100 has disappointed my expectations very much so, particularly in the second quarter. It had a fairly decent, very, very good, got off to a great start to the year, did the FTSE 100, went up to 8,000, slowed quite a bit since then as we can see from this daily chart here. Obviously, sold off in March rebounded quite strongly, but since then the performance has been fairly lacklustre. And I think that is a concern for me going forward. I think the fact that we're making lower highs is a worry that perhaps if we don't get back above this 50-day moving average and the 200-day moving average, we could start to roll over into Q3. A large part of the weakness in the FTSE 100 can be easily explained away. Weakness in energy prices, no less. Obviously BP, Shell, the mining stocks as well. Weakness in commodity prices has weighed on the FTSE 100 in the second quarter of this year. And the bigger question is whether or not that will continue. We've also obviously the weakness in the banking sector, the problems of the UK economy. And particularly when it comes to high guilt yields, which we can see here, this is the UK two-year guilt yield, that obviously is a concern going forward. Markets are pricing in further rate hikes from the Bank of England. They're actually pricing in around about another 100-125 basis points. Now, I think that's slightly, I think that's slightly too extreme. But nonetheless, the two-year guilt yield has finally taken out the post-trust highs back in October, which we're here. Five years probably hasn't, the moves in the five-year and 10-year haven't been as extreme. But I think a large part of the reason we're seeing this move higher in UK guilt yields is because there's this expectation that because the Bank of England is behind the curve, they're going to aggressively tighten and outpace the Federal Reserve and the ECB. Now, I think that's unlikely, been wrong before, could be wrong again. But ultimately, I think inflation should come down on its own if the UK economy continues to stagnate in the way that it has been. And let's not beat around the bush here. GDP growth of 0.1% in Q1 and 0.1% in Q4 is not ripping up any trees. And higher rates is going to feed into the housing market. It's going to mean that more and more people stay put, while the number of people who are on fixed-rate mortgages, two-year fixes that were set during 2020-2021, are either coming off them or about to come off them. So that could act as a drag going forward. So keep an eye on two-year guilt yields. I'm still not convinced that the Bank of England will hike more than two more times between now and the end of the year. Definitely going to be going in August. And the only reason I'm saying that is because the Fed is going to be going in July. And a large part of the reason for the Fed going in July is simply on the basis of this week's economic data, which has been fairly solid. And that's really, I think, borne out in the way that US two-year yield has behaved over the course of the past week or so. Big jump higher, 4.91%. And now heading back to the highs that we saw just prior to the March meltdown when we were above 5%. So looking at the US, Powell, Jay Powell, the Fed chair has suggested that we could see another two-rate hikes. Certainly markets are pricing it that way. The labor market data still looks really resilient. And obviously we've got non-farm payrolls coming up next week for June. And that's likely to be another reasonably positive number after the bumper number that we saw in May of 339, while April was revised up to 294. Now, June, we're expecting 213. Again, there is this tendency, I think, 14 months in a row, economists have basically low-balled non-farm payrolls. And 14 months in a row, the number has beaten expectations. Now, the Fed has downgraded its forecast for your end of year unemployment from 4.5 to 4.1%. Also, vacancies have gone back up above 10 million again. So I think there is this expectation that the Fed may go again in July and then pause again. I think it's unlikely that we'll see more than, say, two-rate more-rate hikes, simply on the basis of the fact that rates up between 5.25 and 5.75% are already restrictive enough. And ultimately, what you don't want to do is tank the economy. You just want to make sure that rates stay higher for longer until the pass-through effects slowly go through the system. And at the moment, 13, 14 months down the line, 15 months down the line, I'm not sure the full effects of all the rate cuts, rate hikes that the Federal Reserve has implemented have fully filtered through into the system, same with the Bank of England, same with the ECB. So while markets are pricing in much more aggressive rate hikes, 25, 50, 75, or in the Bank of England an awful lot more than that, I will be surprised if the Bank of England outhikes the Federal Reserve, which suggests to me that UK pricing is way out over its skis. Looking at the FTSE 100, what we don't want to see is really taking out this series of lows through here, 7,375. We've got the low there back in May, which is 7,440. The low this week was 7,400. So I think this area through here is a very, very key support area for FTSE 100. So I'll be really interested to see how that dynamic plays out. If we look elsewhere, while the FTSE 100 continues to remain weak, the DAX on the other hand has performed fairly well so far year to date, hasn't really got anywhere in the last quarter, but it hasn't given up the gains that it's put in since all the way back here at the start of the year. So basically we've seen some solid gains up until April, since April, traded sideways. I'm still constructive, while this support line here comes in around just above 15,600. It's held really consistently over the course of the past three months and it is now starting to look as if momentum is starting to turn positive again. Looking at the NASDAQ, again, I mean this is an absolute bumper quarter and a bump off half year. Pretty much outperformed everything else, bar none, but what's significant about this is it's really a very small narrow cohort of stock. So I'm going to call it tech bloat because that's essentially what it is. An awful lot of the rebound that we've seen so far this year in the US has been largely down to a very small cohort of stocks. If you look at the Dow, if you look at the Russell 2000, then the gains are much more, they're much more subdued. You're looking at 3% to 4%, no more, no less. The S&P is up over 10%, the NASDAQ is up over 34%. So that gives you an indication of the narrowness and I think if US yields continue to push higher, it's going to become much harder to justify some of the gains that we're starting to see in some of the more highly valued areas of US equity markets, companies like Nvidia, companies like Tesla, for example. Yeah, you can actually buy in to the electric vehicle, the electric car narrative and obviously the fact that Tesla has been able to sign agreements with other automakers to use its charging network, does that justify the valuation that we are currently sitting at? Whatever your thoughts on that, the trend is still very much to the upside. So with respect to US markets, while I am skeptical of this rally, we are still getting higher lows and higher highs. So on that basis, you have to play this sort of market from the long side. You cannot look to try and pick the top. It's very dangerous to trade against the trend. The trend is up, higher lows, higher highs, looking to buy the dip and obviously the biggest support area at the moment, away from where we are now, is this series of lows through here, which can be seen around about 14,200 on the next day. You've also got the 50-day moving average and you've also got this trend line here. So we still remain very much in uptrend line territory or uptrend territory, in the same way that we are for the S&P 500. Similar narrative. Again, solid gains so far year-to-date, still looking very well supported. In this case around about 4280, 4,300. So we would need to see a break below those series of peaks through there, as well as this trend line, as well as the 50-day moving average. So again, as we head into July and the third quarter, I'm still constructive on US markets, despite my skepticism. And this is where you have to suppress your inner voice and just look at the price action. What is the price action telling me about US markets? They're in an uptrend and no matter how much I distrust this rally, you have to follow the price action. Similarly, Nikkei 225. Now obviously, an awful lot of the rally that we've seen in the Nikkei 225, one of the few markets that has actually probably outperformed the NASDAQ or been able to match it, we are well above the 200-day moving average. When we start to get to these sorts of extremes in terms of distance from the 200-day moving average, you start to have to think about fading some of your long positions, not necessarily going short, but starting to pair back your expectations of further Nikkei gains. We are still back at levels that we last saw in 1990. Dolly Yen still looks strong. The Yen continues to look weak. We've hit 145 earlier today for the first time since November last year. But you've got to consider the fact that now we could well be straying into intervention territory when it comes to the Bank of Japan. Bank of Japan last intervened when we were around about 150 and 145. We are back there now. This is one particular prediction of mine that's come back and slapped me right in the chops. I expected Dolly Yen to actually continue to fall at the start of this year when we were around about 134. I expected the downtrend to continue. That hasn't happened. A large part of the reason why that hasn't happened is because I had expected the Bank of Japan to have started to tee the market up for a pivot when it comes to monetary policy. That has not happened yet. Also, the Fed has gone slightly more hawkish and is still in rate hiking mode. Again, I expected that to start to come to an end in the middle of the summer. Now we're looking at a July rate hike with a potential for a September rate hike. That particular prediction, unfortunately, hasn't turned out in my favor. I still wouldn't be short now because I would have cut my losses when we broke back above the 50-day moving average. We started to turn positive on that and the trend started to turn around. You've got to know when to basically cut bait when it comes to calling time on a particular idea. It would have been the right thing to do because we're now at 145 and we could well head back towards 150. We are at record lows on a TWI trade-weighted index for the Yen. Record lows on the Swiss franc were multi-year lows against the pound or multi-year lows against the euro. This is just simply not sustainable. We will see some sort of verbal intervention or physical intervention from the Bank of Japan over the course of the next few days and weeks, or alternatively, we could see a tweak to yield curve control. At the moment, it's like picking up pennies in front of a steamroller when it comes to Dolly Yen. You're going to get crushed if you're going to try and pick the top. At the moment, even though it's tempting to do so, trying to time central banks can be very tricky indeed, as we've all found out this year. Looking further on, obviously, we've got the RBA in the coming days, another rate decision there. What will the RBA do when it comes to further rate hikes? I don't know why I closed that. Let me just reopen that one again this week. There we go. We've got another rate decision from the RBA. We could see another 25 basis points from the RBA. The Australian dollar has slept back quite a bit over the course of the past couple of weeks. I think there's this expectation that they might go on hold. I'm not convinced they will. The cash rate is 4.1%. They're still lagging well behind every other central bank. We could see another 25 basis points to 4.35%. Certainly, they've been stung, like the Bank of England, by a lot of criticism for their very tepid and weak reaction to inflation. If you look at the RBMZ, their rates are 5.5%, Aussie rates are 4.1%. That would suggest they still have the scope to do a little bit more. Could they do a little bit more as an entirely different question? Because what we are starting to see evidence of is deflation. We're seeing it in PPI. We're seeing it in China. We're starting to see it in Germany, particularly on the PPI measures. Not so much on CPI, not so much on core, but as we all know, PPI generally tends to be a leading indicator for what's coming down the pipe. An awful lot of people are warning central banks that they are starting to tighten into a downturn. Let's not forget the EU is already in a technical recession. Two successive quarters of negative growth as is Germany. The big question is, how much more room has the ECB got to tighten? How much more room has the Bank of England got to tighten? Certainly not 100 basis points if the markets are to be believed. I still remain highly sceptical of that pricing. Again, we'll have to wait and see. We're here and now fairly decent support on Aussie dollar around about the 65, 70, 65, 80 area, which is around about 40 or 50 points below where we are now. It really depends on the narrative that the RBA gives out when they announce their decision on the 4th of July. Obviously, we've got the US Independence Day holiday during the start of next week. We will see some evidence of a little bit of a drying up of liquidity in the middle part of that week, but we do have non-farm payrolls. We will be leading up to those numbers on the 7th of July. Looking at euro-dollar, we're still in the range, sadly. Fairly toppy anywhere above 110 and fairly well bid anywhere above 106. I really don't expect that to change. The pound has been looking a little soft in recent days, but nonetheless, we are still in that uptrend that I've identified previously, and it has done very well over the course of the past few months. We need to hold above the 50-day moving average. We need to hold above 125. I'm still constructive on the pound against the dollar, even if some people are probably more bearish. I certainly think there's potential for us to go to 130 against the dollar in the short to median term. We've also got Fed minutes out on the 5th of July. Obviously, we've heard an awful lot from Fed officials since that meeting. Certainly, I think the hawkish message and messaging that we've been seeing and hearing from Fed policymakers should give us some indication of the contents of this week's Fed minutes. I'm not sure that they're probably going to offer too much in the way of surprises. The recent commentary from Fed officials hasn't already given us. What were the thought processes of the more dovish members of the FOMC? What are their concerns? I think we pretty much know what their concerns are. At the moment, a weak labor market isn't one of them. Certainly, inflation is heading in the right direction, but core prices continue to remain sticky. The bigger question is, how many more rate hikes, given the aggressive dot plots that we saw, how much of disagreement was there amongst Fed officials before they decided to suggest that two more rate hikes were possible and even probable? Those are the key things for me. In terms of the earnings, we're fairly quiet. We've obviously got manufacturing and services, PMIs. We've been continuing to see divergence there between manufacturing and services. The services now are starting to look a little bit soft, particularly in France, where we saw flash numbers drop from 52.5 to 48. The big question is, is services now starting to fill the strain from what manufacturing has been feeling for several months now? On the earnings front, we've only got a couple. We've just got a few retailers. We've got four year numbers from AO World. We've got Sainsbury's first quarter numbers due on the 4th of July. We've already heard from Tesco's, and Tesco's numbers were by and large fairly decent, given the challenges that they face. They face higher cost bases and what have you. All we did know was clothing in general merchandise tends to be more of a drag. Certainly in Sainsbury's four year numbers, it accounted for a decline of around about 3% year on year in terms of sales. For 2024, Sainsbury says it expects to repeat and possibly exceed underlying profit before tax. The recent Cantile Survey showed that grocery price inflation is continuing to ease. However, it's still at a fairly eye-wateringly high, 16.5%. But if we look at the way Sainsbury's chart is playing out here, we are seeing a little bit of a roll over here, but it still looks fairly well supported. Even if we do see a little bit of a disappointment and a drift back to the 200-day moving average, it is heading in the right direction going forward. I think that's pretty much it for this week, this month and this quarter, ladies and gentlemen, always a pleasure to talk to you. As I said, don't forget to tune in for non-farm payrolls next Friday, 1.15 webinar. Sign up for it. I'll cover the numbers live as they break. Until then, hope you all have a nice weekend and speak to you all same time, same place next week. Thank you very much for listening.