 Good morning. Welcome to CMT markets on Friday the 21st of October and this quick look at the week ahead beginning the 24th of October It's it's really been quite a week. I mean UK politics Continues to drive market volatility particularly Particularly in terms of the value of the pound guilt markets as well China slow down There was a whole raft of Chinese economic data That was due to be released earlier this week, which has now been delayed and we don't know until when The reasons for that are not known, but ultimately I can't imagine it's because the data is any good China has Said that it's prepared to relax some of its inward bound quarantine measures, but it's hard to see what difference that will make to The slowdown or the performance in the Chinese economy Over the course of the next few months, you know, and I think this is this has really been the key here Fed officials have been very very vocal in calling for much higher rates. We've seen mixed earnings I think we can safely say that the earnings Outlook has been fairly weak Tesla obviously disappointed and we're coming on to a very very big couple of weeks for global markets US 10-year Treasury yields above 4.2 percent highest levels since 2007 we can see that We can we can see that in this this graph here, which I'm about to show you and they've pretty much gone parabolic over the course of The last few months if we look at say for example UK guilt yields again This is the 30 year back above 4% after a brief dip yesterday on Thursday on The announcement that Liz Truss is stepping down as Prime Minister if we look at the 10 year again We can see a similar Uplift today up 12 basis points after some really awful Retail sales numbers for September minus 1.6 percent coming on top of the big declines that we saw In August is not looking particularly pretty for the UK economy nonetheless We can at least console ourselves with the fact that borrowing costs are lower than they were Two to three weeks ago when that mini budget was released. So we are now on the cusp of another leadership contest From this dumpster fire of a government. So the big question is who's going to take over? You know, there's been reports as I record this video that Boris Johnson could be preparing to Make a comeback Rishi Sunak obviously is in the frame The 1922 committee have changed the rules are changing the rules to make sure that this time the process for electing a leader new Prime Minister is Is speedier and hopefully we may know by Monday But certainly will know by Friday at the latest Friday the 28th ahead of the mini budget on the 31st of October a lot of which has already been trailed by the new Chancellor of the Exchequer Jeremy Hunt who is not standing in the leadership contest So it looks quite likely that we could have a new Prime Minister By Monday, but certainly by the 28th of October who that is is anybody's guess but what I would say Here's that while there was an initial relief rally in the pound on the back of Liz trust stepping down It's really hard to see anything tangibly positive for the pound whoever Takes over the Conservative Party in its current form is so ribbon by partisanship That anyone who takes over even if it's Rishi Sunak, even if it's Boris Johnson, whoever There will always be those working in the background to undermine the leader, you know And I think that is the real biggest problem going forward We need a unity of policy With any government whether it be Conservative or Labour there are some who are calling for a general election, but let's let's just remember that if a general election is called It's probably unlikely to happen much before December So you're going to get another two or three months of uncertainty So you've really got a way up whether you want another two or three months of uncertainty or whether the Conservatives can get their act together And that's going to be a big ask get their fiscal act together and actually reassure the markets The good news is at least UK guilt yields are back below US Treasury yields But certainly I think in terms of the outlook going forward. We've got European Central Bank meeting coming up In the coming week. We've got the Bank of Canada. We've got the Bank of Japan Obviously, that's a big meeting because of dolly in at 150 And then that's followed the week after by the Federal Reserve and the Bank of England who have to sort of try and make economic forecasts based on this train wreck of Governance if you like so Let's start for the here and now we've got the ECB coming up in the coming week. We've got the Bank of Japan We've got the Bank of Canada. We've got us third quarter GDP We also have it's a big week for earnings We've got a big week for UK banks and obviously UK banks this week took a little bit of a hit on reports that The any new government new administration could be looking at a windfall tax on UK bank profits now. I mean, there's many reasons to criticize Banks here in the UK notwithstanding the measly returns that you get on your savings. Maybe that's something that Politicians could start talking to the banks about because when you look at lending rates and two-year mortgage Two-year fixed mortgage rates at 6% and I saw rates of 0.7 You know, there is a little bit of a mismatch there so I Certainly think there is scope for the banks and maybe for the banks to certainly I think return more of their profits to their customers in terms of higher returns on Their cash deposits. Nonetheless, we've got HSBC on the 25th of October. We've got Barclays on the 26th of October We've got Lloyd's on the 27th of October and we've got Nat West on the 28th that's not also to get that Banks currently pay the headline corporation tax rate plus an 8% levy bank levy on top of that So from next year, they will be paying an effective tax rate of 33% And ultimately you really do want the banks to try and continue to lend to the real economy Even if as things get more and more difficult and obviously if interest rates continue to go up They're going to have to make larger provisions for non-performing loans as we've seen in recent US bank earnings So there is that to consider and we've also got third-quarter earnings from Shell Talk of an additional windfall tax on top of the 65% Real tax rate that the big oil companies pay on the UK earnings, you know And again, you've got the UK government tendering oil and gas licenses for the North Sea So you want the oil companies to basically drill for more natural gas while at the same time looking to increase The corporation tax rate from all the actual effective tax rate from the current 65% Not really sure how that's going to work. So Certainly raising tax rates or keeping the Rishi Sunak inspired Raising a corporation tax rate has reassured markets But ultimately at what cost to the UK economy heading into 2023 I'm not really sure the raising taxes particularly on business is the right way to Deal with this particular crisis, but unfortunately the UK's fiscal credibility with the markets is currently so shot to pieces That perhaps another three or in three or four months time of Responsible stewardship of the economy may allow a tempering of Those raising of tax rates as we head towards the next fiscal year for the here and now Sentiment continues to look bearish. Let's use one back back below 7000 it briefly dipped below that 6805 level that I highlighted and talked about last week It looks increasingly likely. We're probably going to retest it. I'm over the course of the next few days Similarly, if we look at the German DAX We are still very much in the downtrend that we've been in over the course of the past few weeks I am slightly encouraged by the fact that we are above the lows of October But I still can't help feeling the direction of travel here suggests that we're going to get a return to these lows And potentially take them out At the big level and I think the big driver will be the S&P 500 I talked about this a little bit last week that's three and a half thousand level for the moment We appear to be holding above it It's also the 50% retracement of the entire up move from the 2020 lows to the 2022 highs So that's going to be enormously Important in the wider scheme of things will get rid of that line there And that will give us a fair idea of where we are at the moment in terms of the rebound I think to stabilize we need to get above this series of peaks through here So that level is around about 3810 3807 if we can get a sustained break back Towards the 50-day moving average and then push above it then I think there is hope that we may have seen the bottom but at the moment I'm driven very much by the price action in terms of my mindset and my mindset at the moment is very much Selling to strength similar sort of story on the Nasdaq 100 We've managed to hold above the 61.8 fib level of the entire up move from the lows Back in 2020 to the highs earlier this year But ultimately these two levels 10,500 on the Nasdaq 100 3500 on the S&P 500 they are for me potential lines in the sand when it comes to further Stock market losses and at the moment the outlook is not looking particularly positive So what's going to stop? Markets from moving lower. Well, if the Fed shows any indication of a pivot that doesn't look likely We've got the likes of Neil Kashkari of the Minneapolis Fed talking about the prospects of much more aggressive rate hikes and that they prove That the Fed is prepared to over tighten doing too much rather than doing too little and let's not forget Neil Kashkari is generally tend to lean more towards the dovish side In some of his more historical utterances So he tends to be perceived as a dove the only person that at the moment I've heard talk about concerns that there may be a lag effect when it comes to Monetary policy is Fed governor Lyle Brainerd But she does appear to be in a minority at the moment It'll be very interesting to see what the tone of the discussion is at the November meeting But it certainly looks increasingly likely that we'll see 75 basis points from the Fed in November and market surprising another 75 basis points in December We've got euro dollar Increasingly strident calls from some ECB officials for a 75 basis point rate hike from the ECB when they meet on the 27th of October Despite an acknowledgement that GDP is likely to fall quite sharply These calls for a more aggressive tightening have continued to increase despite PPI at 46 percent in Germany and a headline rate of 9.9 percent headline rate of 9.9 percent in the EU We also have to remember that that headline rate is being held down By French CPI which is around about 6.6 percent Largely because of the efforts of the Macron government in terms of Imposing an energy price cap on the companies that sell Electricities electricity to consumers essentially the French government is paying the difference when it comes To the energy price costs and yet no one's freaking about freaking out about the cost of French sovereign debt despite the fact They have a GDP debt to GDP ratio Which is around about 15 to 20 points above where the the UK's is but I digress The line of lease resistance for euro dollar continues to be sell the dip sell the rally Resistance 50-day moving average in this downtrend line here. It's finding a little bit of support at around about 96 20 But the low the highs the rebounds are still fairly shallow if we look at these you've got lower highs The big question will be is how the markets react when we see a return to this trend line here Which I've just drawn in On this daily chart here So keep an eye on any test back towards this line see whether or not we break below 96 20 because it's quite likely We could head lower same applies to the pound really that's looking really heavy in early trade this morning Ran into a wall of selling around about 114 Also the 50-day moving average it does look as if we're probably going to see a revisit of 109 20 which was the lows back on the 12th of October and We could we'll see further weakness if UK Guilds continue to edge higher. We've I think gone slightly beyond the We've slightly gone beyond the scope of higher rates will help to support the pound I think probably the likelihood is that the reverse is Now true and that's really no better borne out by Euro-sterling where we continue to see fairly decent support in and around this trend line that I've drawn from the low Through here, but also the hundred day moving average The next resistance is 88 60. Obviously. This was the mini budget We've come back down since then but we do appear to be heading back higher again while this uptrend line is intact so Looking ahead to the ECB Rates are heading higher German 10 year yields are now nearly 2.5 percent Italian 10 year yields are even higher than that and at some point there are going to be some serious questions asked about That the level of yields in some of the weaker eurozone countries Which is going to be a big test for the ECB when it comes to the TPI program their transmission protection Medicine if you like When it comes to borrowing costs got the Bank of Japan, we've got dollar yen We're now above 150 the likelihood is that we're probably going to go back to go even higher Towards 152 30 talk of intervention Ultimately the Bank of Japan can talk about intervention until it's blue in the face until they order the monetary policy settings It's unlikely that the dollar yen will continue Will continue it's unlikely the dollar yen will dip that much will probably head towards 150 230 Towards 155 towards 160 We will probably get some intervention at some point the whole point of the intervention is not to prevent the end weakness It's just to slow it down We we saw back in September that we got a bit of intervention which was here All it did was slow it down for a few days before we then carried on moving higher and while US Treasury yields continue to widen away from JGB's the likelihood is that we're going to see 155 and 160 over the course of the next few days and weeks We've got the Bank of Canada as well Got a similar inflation problems pretty much everybody else We've seen some bump hikes from the Bank of Canada They haven't made any difference in terms of the strength or otherwise of the Canadian dollar Continues to remain weak not helped by the fact that the oil price Continues to come under pressure and it's probably likely to continue to do so irrespective of what OPEC plus Continues to do with respect to production cuts. They'll probably cut again, but while Chinese demand remains weak and Pressure on incomes remains weak Then the likelihood is the demand side of the equation is likely to pressure oil prices going forward We've got US third quarter GDP and core PCE not really going to Place much Importance to that. We've already seen two negative quarters for US GDP in Q1 and Q2 the only reason to see a rebound in Q3 is likely to be due to Inventory rebuilding personal consumption which are growth of 2% in Q2 Is expected to be much weaker in Q3 so you could have the perverse Situation whereby you get slower personal consumption and that's likely to come in around about 0.8% But you could actually see a really decent rebound in third quarter GDP of around 2% But again, that will be inventory rebuilding as we head into the end of the year and a potential potential Christmas and Thanksgiving bump in consumer spending which in the US Has been slightly more resilient this year, but is certainly looking a lot weaker in Q3 Then it was in Q2 so Let's quickly have a look at the key numbers that I'm looking at next week. We've got shell Coming out third quarter numbers seen big jump in revenues and profits this year It's had its fair share of the problems when it comes to Russia It's managed to be it's managed to decouple a certain amount from that Q2 saw another record quarter for the oil majors or the oil major Q3 Probably looking at the oil price and the gas price gas prices are lower oil prices are lower I'll be surprised if we see a Significant outperformance relative to Q2, but certainly I still think we'll see some fairly decent profits And that's likely to renew further political cause for an increase in windfall taxes on this particular sector It starts to get a bit boring after a while these calls for windfall tax if you want to encourage companies like Shell to Extract North Sea gas assets, then I think you really need to start thinking a lot more carefully about Calling for windfall taxes because why would you as a company? Invest in the North Sea oil if you're going to see 70 or 75% of your taxes Taken away as a consequence of that upfront investment. It just makes absolutely no sense to me whatsoever Banking shares Nat West we've got coming out with their third quarter numbers of God got a fairly decent set of Q2 numbers since then we've seen them a little bit of a pullback largely on the basis of Obviously the weakness in the UK economy similarly for Loids as well Not altogether surprising Most of the banks that Western Lloyds make the bulk of their profits on the loan differentials between lending and What they take on deposits and that's probably as wide as it's ever been But we also have to be aware that we could well see Significant increase in impairments on the back of rising mortgage rates And I think that's something that we do need to be acutely aware of as we look at the numbers particularly for Lloyds and For Nat West operating costs also going to be higher higher wages Some some Nat West branches are starting to be closed now at the high street level So I think banks are looking to cut costs that way So that that obviously needs to be a factor as well But if we look at say for example now at West we can see that every time the share price has got anywhere near 200p We've seen a fairly decent rebound So I don't expect that to change it still remains very much a case of by the dip for Nat West similarly Lloyds has been a bit of a head scratcher for me because Lloyds has been probably more profitable now Than it was two or three years ago and yet the share price is at half the levels it was back in 2017 or even pre-pandemic 2019 Yeah, it's really struggling to get much above 50p though There is fairly solid support 40p and ultimately also pay pays a fairly decent dividend. So at some point This weakness in UK assets Is likely to resolve itself or by itself bark plays an HSBC Investment banking business HSBC is going to be particularly interesting I think in terms of its age of business given the weakness that we've seen in China How much of that weakness in China is going to affect? HSBC's numbers you can see the way the the share price has performed over the course of the last few weeks with respect to HSBC and we can see that It's find a little bit of a base around 440p But around about 480p is finding a little bit of a resistance. So I think slow down in its age of business We could we could see a negative surprise for HSBC Given the fact that that's where HSBC makes the bulk of its profits and obviously we are also looking at big tech I've just picked out Microsoft and Apple because I'm a little bit strapped the time But we do we also have Amazon and We have alphabet as well as we had as we start to look as well as meta platforms Facebook and Given the horrible snap numbers that we saw late on Thursday night Meta platforms is certainly going to be an interesting one given the fact It's had a real shocker of a year share price wise when it comes to Microsoft Let's look at the Microsoft chart. We are in a very much a downtrend when it comes to the Microsoft share price Irrespective of how well That company has continued to perform But one of the key notable things that I took away from its last earnings announcements is Q4 earnings announcement was that PCs and gaming revenue was starting to so we're starting to show Significant signs of stagnation and potentially a slow down In its last quarter, we saw that PC and gaming revenue pretty much Came I came in slightly above the levels a year ago at fourteen point three six billion dollars and Actually negative sales growth in Xbox and content of minus six percent and Windows OEM of minus two percent Suggested that demand was slowing for these bigger ticket items Microsoft saying says it expects to see first quarter revenues of between forty nine point two and fifty point two Billion dollars would still be ten percent higher than a year ago But it would be markedly down from what we saw at the end of last year So keep an eye on 220 that key support level Through there for and the lows that we saw during October Apple Production of its iPhone 14 We're in a nice triangular consolidation here seen a bit of a rebound over the course of the past few days But ultimately I think the fact that Apples downgraded its iPhone production or cut back on its iPhone 14 production suggests Either they're not seeing the demand for the new iPhone or they're having production issues They also left the prices for the new iPhones unchanged which also suggests that perhaps they are starting to become a little bit more price sensitive and It'll be very interesting given the fact that Q1 the next quarter tends to be the most profitable quarter whether or not markets start to price down the likelihood of a significant slowdown in iPhone and iPad sales as we head into the Thanksgiving and Christmas period as a reminder Apple Haven't given any guidance for the last two or three years So they're not likely to change that outlook, but it certainly does look as if the outlook the big tech Is likely to become an awful lot more difficult over the course of the next few weeks So we've got a big next couple of weeks They the the outcome of next week's central bank meetings and the week after are likely to be a key arbiter of Where risk is likely to go to next but ultimately what I'm seeing and what I'm thinking is that it still remains very much a case of Sell the rally in stock markets until such times as we get a breakout of those downtrend lines that I've been talking about and highlighting In the videos of the over the course of the past few weeks Otherwise, that's it for this week. We've got a big week coming up new prime minister Big central banks big earnings. I hope you all have a great weekend and good luck trading next week