The September Reading List

Hello my fervent readers and welcome to the September edition of the reading list. This might just be my favourite edition of the reading list so far this year. It also happens to be one of the broadest in scope of the lists I have curated thus far, covering a range of classic fiction to the Revolutionary War. 

I’m also pleased to say I’ve returned to the 5 books per month format - and this was no mean feat this month with over 3000 pages included. 

The Return of a King - William Dalrymple:

My favourite book of the month was definitely the Dalrymple and The Return of a King on the 1839 - 42 war in Afghanistan. It is quite remarkable to see the similarities of the errors committed by military officials then compared to now. 

I particularly like the compelling narrative structure of this which made it very easy to jump in and digest what is actually quite a complex story. Likewise, Dalrymple does a great job of bringing the characters of this woeful tale to life and you feel able to relate to not just the British officers in their suffering but the permanent plight of the various local rulers such as Dost Mohammad. 

In fact, I enjoyed Dalrymple’s style so much in the next month’s list I’m reading “The Anarchy” on the East India Company’s rise - once again I’m picking areas of history which I have no prior knowledge on to try and gain a broader understanding of the historical context. 

On the whole, this book emphasises that despite expending vast sums of money all to aims which are poorly understood, not well-defined and frankly foolish to anyone who has considered the difficult terrains of Afghanistan. Much of this sounds very familiar...

The Premonition - Michael Lewis: 

Now this one has been on the upcoming reading list since the moment it was released with Michael Lewis peeling back the curtain on the pre-pandemic plans which were in place from various administration officials. 

In his usual style, the narrative of this book is very compelling and shows that there were clear plans for dealing with a pandemic which many of the governments of the world chose to override. 

What is particularly stark is the way all things which we now consider normal - like social distancing, mask wearing and temporary closures of various spaces. What was most stark to me though was the revelation that the single best way to control viruses was via the closing of schools, which was the most anathema policy all the way through the pandemic. 

This book simply must be read. 

Catch-22 - Joseph Heller: 

Onto a bit of a fiction now. Everybody is aware of the concept of Catch-22, and I thought it was about time I got around to reading the original book. 

I have to say, I was a touch disappointed with this one and felt it lacked some of the more potent gravitas of some of the books on the most recent reading lists. Nonetheless, I did enjoy the dry witty humour of the various Catch-22 scenarios uncovered in the various wartime scenarios and it was an entertaining if actually rather disturbing book. 

Lords of the Desert - James Baar 

This was another very interesting read on Middle-East history. Regular readers will know that a few months ago I read “A Line in the Sand’ by the same author, and this was largely about the founding of modern Israel. 

This was another particularly interesting read as it focused on two traditionally very strong allies - the UK and the US - but outlined the differences we faced throughout our interactions in the Middle East after the end of the Second World War (and to some degree, before). 

Baar constructs an enthralling narrative of various backstabbing and underhanded activities - particularly in the era of some of the big American Foreign Policy names like Dulles and McNamara. The story of course culminates with the effective total demise of Britain from Middle-East, but this is not to the Americans advantage as it soured relations for a number of years - particularly when those like Johnson most needed international support in the Vietnam years. 

Washington - Ron Chernow: 

It’s been a while since I included one of the ultra-long presidential biographies on a reading list, and this time i went for the man himself... George Washington. Chernow is perhaps my favourite historical writer and he covers the majesty of this great figure in such depth but in a way which is really rather enjoyable and easy to read. 

Chernow adeptly captures all aspects of the Washington biography from his time as Leader of the Continental Army to his time as a Constitutional writing supervisor to his time as President. Chernow adeptly points to the way in which this man who longed so much after independence to retire was continuously drawn back into the political fray - initially, he didn’t want a term as President, then he said he’d do two years to secure the union, then no to a second term, then a few years more. 

What is totally clear from this writing is that Washington is not a man who was addicted to power, but rather a reluctant figure who was entirely impartial and determined to do what was best for the Novel Union. 

Frequent readers will of course know that I have enjoyed reading about a number of the military battles in the American Civil War and at other periods, and this is another area where Chernow excels in bringing colour to a number of the famous battles where Washington took part - namely at Bunker Hill, Rochester Heights and in a number of his daring overnight manoeuvres. 

Lastly, what is particularly great about this account of Washington’s life is the way Chernow does deal with the issues surrounding slavery and Native Americans with which Washington struggled so much during his life. Chernow is not afraid to be critical in some regards but here I feel like he has maintained the right tone in trying to be impartial and recognise the complexity of the issue which Washington faced. In his dying requests, Washington ordered his own slaves freed and this was, from a political standpoint in the new Union, the only time where he really had the option to do so. 

This account of Washington’s life is simply magisterial, and this was no doubt one of my favourite books of the year. 

Next Month: 

It’s another busy month of reading lined up ahead. I’ll be reading from wide sources once more but Dalrymple on the East India Company is probably the one I’m most interested in. I will also be reading Dan Jones’ new history on Powers and Thrones; Tom Holland’s Dominion - The Making of the Western Mind -; Kahneman’s Thinking Fast and Slow; and Timothy Snyder on Tyranny. 

That’s all for this month folks, and please do get in touch as always with your many suggestions, I promise I am trying to get through them all gradually!

After the FOMC

 After the FOMC 

First things first, apologies this update is a little late, but the market moved a lot yesterday and every time I tried writing an update my numbers were out of date in no time. 

Nevertheless, I’ve put together a few thoughts on the recent FOMC meeting below: 

Key Takeaways: 

Fed forecasts show that members are evenly split on the possibility of a 2022 rate increase. 

• We had a couple of moves in the dots so the median now expects a hike in 2022. 
• For me though, this is unimportant - the committee acts on the recommendation of the chairmen and as long as Powell wants to be on hold this is likely to be the outcome. 

Moderation in Bond Purchases May Soon be Warranted: 

• This is the critical takeaway from the whole meeting. 
• The Fed now feels it is in a position whereby tapering of asset purchases may soon be ready. 
• This is what the market has been waiting for - and it is a testament to Powell that he was able to deliver the news of the taper without the market reacting aggressively to the downside. 

Changes to Projections: 

• The FOMC also updated their projections for key economic data and what stood out to me was that they still only see core PCE at 3.7%. They have been on the backfoot with these numbers a long time. 
• We saw the BOE announce that it expects +4% inflation this year so this is likely to be similar around the world. 

Reverse Repo Limit Doubled: 

• Around two years ago I wrote a piece explaining repo - feel free to use the search functionality to find it or message me and I can send to you. 
• But basically, this is reverse repo - in other words for draining liquidity from the system when banks have too many reserves. 
• The doubling of this shows the Fed anticipates these conditions lingering - each institution can now tap the facility to the tune of USD160bn!

Powell says substantial progress on inflation has been achieved: 

• Fairly obvious - inflation way above target. 

Powell says the employment “substantial further progress” has been “all but met”

• This was pretty key for me as going into the meeting I anticipated Powell being the dove among the hawks. But this appears to not be the case with Powell basically saying he is happy to taper now. 
• He wanted to see a “decent” jobs report for September numbers but doesn’t need to see a “blowout” report. 
• This puts Powell in a bit more of a hawkish position than I think many expected - this may explain the significant leap higher in the 10y yesterday to 1.4%+ 

On the whole, I thought this meeting was a major success for Powell. He didn’t upset the equity markets, delivered the timing and timeline of the taper and addressed some other key issues like fed credibility in the wake of the trading scandal. 

I’d be pretty comfortable holding equities until the November meeting now. Even further inflation numbers shouldn’t spook the market too much as it seems the Fed has moved away from “transitory” to a more cautious approach to inflation. 

FOMC Preview - At 37000 ft

 FOMC Preview - I’m back - and it’s a busy few days ahead! 

Hello my faithful readers… I have returned from my holidays and truth be told feel even more tired than before I left! Always is the sign of a good holiday when you need another one straight after.

Well… I’m not actually back yet… but it’s FOMC day tomorrow so I’m typing up some stuff now in the air so that I can bring you timely and useful information! 

Anyway, I’m trying to get caught up while at the same time look ahead so please do bear with me.

Quick Wrap Up since I’ve been away. 

Crikey it looks like I’m the only thing holding up the market with the amount the S&P has cratered since I last posted. Thanks Evergrande. But now I’m looking again does look like we’ve had a bit of a recovery. Powell will of course be looking to the market which isn’t far away from a 5% pullback as a barometer of market sentiment and the readiness of markets to accept the taper. 

In company specific news… my long-term followers will know that I’ve basically been a perma-bull on RDS since the start of the pandemic - it’s been a good call so far with my position up 50% or so. But I think we have firer to go - this morning RDS announced a gigantic dividend of 7bn to shareholders in a buyback.

For me this is great news - shares plunged last year in the back of a dividend slash for the first time since WWII and this caused a loss of management credibility. This shows that RDS wants to prove it has restored the balance sheet weakness and win back over some of the disgruntled shareholders. 

FOMC Tomorrow - What’s Expected? 

So lots of focus on tomorrow’s meeting for obvious reasons. Will they taper… or will they hold off for “just one more meeting”. 

Looking at a few charts… SPX has caught a bid today and a bit of relief of pressure generally. I see tomorrow as largely being a boring day until the FOMC decision. 

Watch out for the dot plot - if we start to see a significant move toward hikes now rather than later… this could spook the markets - the 10y yield would be the first to move in that case and the USD would get markedly stronger. 

If we do get a taper announcement tomorrow, there is no question that Powell will attempt to dress it up as still easy money just slightly less easing than before. 

This is important - remember that tapering is just a reduction of asset purchases per month and is not a reversal of asset purchases (I.e. asset sales).

What’s the trade?

For me play it safe until Powell starts to speak - then watch for a Mike McKee question in the Q&A - he’s usually last and they play elevator music in the background etc.

I would look to be short USD, I see further dovish commentary at this meeting as possible but I think the dots are going to be key. 

Don’t be surprised to see the median first hike projection come forward. 

Whatever happens… I think this meeting will be messy and I urge caution. 

That’s all for the primer - sorry it’s short but it’s from 37000 feet. All the best and happy trading 

Away for a few days

 Hey All - Quick note to say I’m OOO for a few days. Taking a much needed holiday - will be back on Wednesday for more market updates. 

Happy Trading 

US September CPI Primer

As usual when there’s big data I put out a short note on what to expect and possible trade ideas. Since I’m a bit befuddled by recent equity price action, the way to play it today is definitely through FX. If the CPI print is higher than expected, sell EURUSD, and if lower then buy EURUSD. 

Market Expectations: CPI 5.3% Y/Y, 0.4% M/M, CORE 4.3% Y/Y, 0.3% M/M

Truth be told though, I’m expecting a pretty big number on today’s CPI, again expecting gasoline to be a big driver - we’re told every day about surging energy prices (especially in Europe… although that is less relevant for today’s data) so I wouldn’t be surprised to see even a 0.6/0.7% MoM increase. 

That doesn’t mean I expect inflation to be persistent. I still buy into the transitory narrative but eventually expectations will shift to have inflation less transitory. 

Even if we see a big beat on inflation today, I would be surprised if it had any impact on the next Fed policy decision, so expect to see a quick reversal of any FX gains over the next days. 

Conversely, a big miss which sees Core CPI well below 4% YoY, would be a clear sign that Team Transitory is correct and would likely hit the USD hard and more persistently. In this case expect a breakout of EURUSD toward and possibly above 1.19 as it plays into the Fed’s transitory hand and they can afford to wait a couple more meetings. 

Source: FXStreet

German Election Preview

To anyone who's remotely interested in world affairs or finance in general, it won't have escaped your attention that there is an election in Germany coming up which will close the door on the Merkel era. Going into the elections several months ago, it was widely assumed that the CDU would be able to maintain its grip on power under a kind of Merkel 2.0 in the form of Armin Laschet. But in recent weeks the CDU has been slumping in the polls to the advantage of the SPD. 

All of this is very confusing to many people (including me), since German politics is profoundly more boring to the untrained eye than the personality politics of the UK & US (and even many others in Europe like Italy, France, Spain etc). 

So what I'm going to do in this article is just try and explain what on earth is going on, provide an outline of who's who and generally keep things quite simple in terms of the various policies of the different parties. At the end, I'll throw in a bit of a spin for financial markets, but I'm going to try and be as factual and concise as possible to end the befuddlement surrounding this issue. 

What is the vote for? 

The vote on the 26th of September will require the German people to cast their ballot for the lower house of federal parliament - The Bundestag. The process involves casting two votes - one for a first part the post style member of parliament, and the second for a political party. The Bundestag is composed of at least 598 seats (there are currently 709). The distribution between parties is shown below: 

At Least 598 seats... how can they have a variable number of seats? 

Indeed to UK or US observer, this seems frighteningly odd... a variable number of seats? How can this be? Of course the UK House of Commons has a fixed (albeit adjustable) 650 seats up for grabs at a general, and the US Presidential election has 538 electoral college votes and so on.

The reason for this is the unique electoral system the Bundestag uses whereby seats are allocated 50% on a proportional representation basis, and a 50% First-Past-The-Post system like in the UK. 

Only read the next part of this section if you're feeling brave :) 

There are always 299 land lists awarded - this is like the constituencies system in the UK. Then the proportional representation component comes into play for the other 50%. But then, adjustments are made to ensure that the population of each "land list" is representative of the number of seats awarded. Then based on this calculation the "political party" section of the vote is calculated and then awarded proportionately to all parties. 

The number of FPTP winners and Proportional Representation winners are compared, and the highest of these two is the parties minimum number of seats in the Bundestag. 

This adjustment though means that there will overall be more than 598 seats across all land lists, and therefore further adjustments need to be made to ensure there is proportionately with the number of votes awarded. 

For the Maths-y among you... see: Webster / Sainte-Laguë method for further information 

This is a very complex process, but the link below explains in a lot of detail about the various maths involved if of interest. 

For a very full and clear explanation of this process, please see the Bundestag explanation here. 

So what happens once all the votes are in? 

Well at this stage there will likely be a lot of wrangling as no party is likely to gain an outright majority. This means there will be a period of negotiations as an attempt is built to form a government. Then likely the biggest party within the coalition will have their head become the Chancellor. 

Who's Who? 

So onto the important section... who is leading each party and what does that party stand for? 

The Christian Democratic Union (CDU): 

The CDU is Merkel's Party and is being headed up in this election by Armin Laschet (pictured below). If the CDU is able to maintain its chancellorship via a coalition with the other parties (currently the coalition is with the SPD) then this will likely be business as usual for Germany. 

The moment it started to go wrong for Laschet - spotted laughing in the midst of the terrible flooding which hit Europe earlier this summer. 

On the political spectrum, the CDU is the centre-right party in Germany. Specifically, it is liberal on economic issues but conservative on social ones. The CDU is very euro-centric. 

Basically, any victory for the CDU whereby Laschet becomes Chancellor is a continuation of the status quo. 

The Social Democratic Party (SPD): 

The SDP was, at one point, running third in the polls. Now it has moved into the lead, with Olaf Scholz (pictured below) the candidate who would become Chancellor. It's a little bit of a weird situation since both the SPD and CDU are currently forming part of the government, and Scholz is the current finance minister. He therefore has to explain why he, alone and without the CDU, would be better for Germany. 

Scholz is now the frontrunner to replace Merkel 

On the political spectrum, the SPD is the centre-left party and it's interesting to me that Scholz was one of the pioneers of the Next Generation EU Bailout Fund worth EUR750bn. The SPD generally has been in favour of modernising and globalising the German economy, but also believes in the "social" aspect of governance and addressing the needs of the poor. 

Unsurprisingly for a German Party though, the SPD has also historically been very careful with Budget Deficits, this all stems back to the Weimar hyperinflation of the 1920s. One significant difference under an SPD chancellorship could be increased regulations on the banking sector. 

Right well that's the two top contenders done... I'll be much briefer on the rest. 

The Greens: 

Most of this party's views is in the name. Unsurprisingly the green party is for greater and faster green-ification of the German economy. Under the leadership of Annalena Baerbock (pictured below), the Greens have done relatively well and are currently polling in third place with about 16.2% of the vote. 

The Green Party could be significant as a coalition maker and is likely to feature in any coalition with either the CDU or the SPD (although one with the SPD appears more likely for now). 

Babcock has been an unlikely partner with business in Germany... 

What is potentially interesting about the Greens is that one of their main policies is to temporarily suspend Germany's restrictions on new borrowing to hit climate objectives. This is quite a shocker to a country as debt conscious as Germany, but the greens are polling well and greater moves toward greening the economy are likely in any coalition with them. 

The Free Democratic Party (FDP): 

The FDP is socially more relaxed than the CDU but slightly more economically laissez-faire than the SPD. You can see that most German parties who poll well fall somewhere in the centrist camp. It has served as a coalition partner with others over the years. 

Led by Christian Lindner (below), the FDP could well be an important cog in any coalition, as the major parties are unlikely to want to partner up with the left or the AfD. 

The FDP is polling around 11% at the moment 

What is perhaps most interesting about the FDP is that it has definitely transformed itself in the last year from a relatively minor party to one which could decide who becomes the next Chancellor of Germany. The AfD has declined dramatically in popularity from the last election highs and the FDP seems to have picked up some of the pieces. 

The AfD: 

Always over-talked about in my opinion given they are unlikely to feature in a government since both the CDU and SPD are strongly opposed to a great many of their policies. 

As we know, the AfD is the far-right populist party and opposes immigration and further European integration. You might say this is my own biases coming through... and I'd agree with you. But so do the most likely scenarios outlined below (source: The Guardian). 

The Linke (Left): 

This is the anti-capitalism party formed from the remnants of the old communist parties. This party doesn't particularly like the centrism of all the other major parties and would rather see a more socially constructed system. 

They are more worth a mention than the AfD because there is a small chance they could find their way into a coalition... they were aiming to court the SpD and the Greens primarily. 

So what is the impact for financial markets? 

Basically the key thing to watch is what the outcome means for government spending in Germany. If we had a coalition which was less committed to the fiscal budget (one involving the Greens for example), then this means we could well see greater issuance of Bunds, increasing the supply and causing a sell-off in the price of these Bunds. 

Over the last couple of weeks, we have seen a notable increase in the 10y Bund yield, and perhaps this is starting to reflect the belief that the CDU/CSU may not get back into power (or more likely, it's related to broader market moves... but let's say the election counts for something ay?). 

An SPD led coalition with the CDU and Greens therefore would likely be a driver for higher yields. One of the promises of the SPD is an obligation to invest which would require a minimum % investment in education / transport etc in each year. 

Likewise, all of these parties are committed to the European Project and would probably support giving the EU more powers over expenditure - especially in light of the fact this has now begun with Next Generation EU. 

If you see the Red-Red-Green outcome a la the polling chart above this could be pretty bad for Bunds too and yields would be quite likely to spike higher. Obviously, the polls don't point to the syet, but it could be relatively close. 

Let's not forget though... this is Germany we are talking about. Nobody is going to rip up the script and go hell-for-leather on government spending, so expect all moves to be moderate and well thought through. 

Is there a trade worth pursuing here? 

BUY EURUSD? 

This could well be a trade worth pursuing in the run up to the election in my view, especially once Fed uncertainty has eased next week. 

If political change is afoot in Germany which prompts them to loosen their fiscal taps just a touch, then I think this is good for not just German growth (and... therefore... inflation prospects) but also for the European Project as a whole as it seems we may well see greater cooperation and spending with the whole Euro Area. 

What does this mean for the ECB? Well we could see a more inflationary environment and if this persists then maybe hikes on the horizon... let's not talk too soon though :) 

Here endeth the lesson. Any questions let me know and I'll periodically update this over time. 

A warning to those in the crypto space

 For those who invest in crypto... beware. 

Some headlines about Walmart having a partnership with Litecoin. Quickly refuted by Walmart. Up, down... buyer beware. 

Take news stories with a pinch of salt (especially ones as unbelievable as this), and be vigilant out there. 

Deep Dive on the JPY - Short-term trade idea... sell USD-JPY pre-Fed.

TRADE IDEA: SELL USDJPY AT 110.1, SL 110.5, TP at 109.7 and 109.4 in Extension

CRITICAL: EXIT THE TRADE BEFORE FED DAY!!

As a general rule, the JPY isn’t my favourite currency to trade given its massive reliance on yield differentials as the JPY still functions as a funding currency. But I’ve taken a gander at the USDJPY chart and I think there are potentially a few things which look interesting. 

 

The above chart shows the daily candlesticks for USDJPY. Since the pandemic (the massive spike down then back up), the JPY trended stronger for a few months but then reversed in a few months. What I find interesting, however, is the current lack of direction which has been ongoing since June. 

 

 

The above chart is a touch more zoomed in at the 4h. The red square marks the recent very tight range between a low around 108.7 at the start of August, and a high of 110.8 a week or so later. Even more so, in the last month we’ve entered an even tighter range between 109.4 and 110.4. This lack of volatility for the JPY is historically quite rare. A cursory glance over the longer-term charts shows that sizeable moves in the JPY are common. 

 

Zooming in again to the hourly chart to look at the recent ranges more closely, we see that we are definitely in no man’s land right now. If we drop to around a 109.6, then perhaps I would start to think about getting long. We’re just reaching the top of these ranges now, so I am actually fancying a short USD-JPY trade. It’ll be a tight one, but I reckon their could be some decent downside move in USD-JPY from here. 

 

What I am also starting to find interesting in this chart is the longer wicks in the last couple of hours. The JPY has basically been unchanged, but there are some hefty spikes down and then rebounds. Perhaps we are getting to a stage where this currency might want to move a bit more significantly?

 

Lots of technical analysis so far? Where is the fundamental? 

 

Well the drivers of the JPY are almost exclusively international rather than domestic. Sure, if it was suddenly announced Japan was going into lockdown and there was going to be a zillion JPY of stimulus this might have some impact, but generally the drivers are yield differentials and geopolitical risk (the JPY is a safe haven). 

 

I’m going to overlook the geopolitical side of things for now. While we could easily make a case that there is a huge amount of geopolitical risk with the Iran deal, US-China tensions, Afghanistan and more, it is not possible to predict a geopolitical blow-up and therefore I’m reluctant to try my hand at it now. 

 

So let’s look at something a bit more familiar… Treasury yields. I’ve stolen the below chart from DailyFX, but it definitely illustrates the clear relationship in recent months between JPY returns and the 10y Treasury yield, with the two moving almost perfectly in sync bar a short period in June. 

 

 

So if I am to have a longer-term view on the JPY, I really need to have a longer-term view on Treasury yields. At this point, I’m not convinced anyone has any real conviction on the next leg of Treasuries. 

 

Fortunately, if I don’t have a long-term view on Treasuries, I do have a short-term one. Tomorrow, yes we have CPI data we could cause a significant bit of immediate volatility in the 10y, but I don’t believe anything really moves until we have the next Fed meeting next week on Wednesday. Therefore, I have enough conviction in the current ranges to enter a short USD-JPY at 110.1, SL at 110.5, TP at 109.7. Risk Reward is 1:1 but could see another leg lower to 109.4 in extension. Take half profit at 109.7, move SL to Breakeven and then see what happens. 

TRADE IDEA: SELL USDJPY AT 110.1, SL 110.5, TP at 109.7 and 109.4 in Extension

CRITICAL: EXIT THE TRADE BEFORE FED DAY. 

The Weekend in Review / The Week Ahead

The Weekend: 

Relatively quiet on the whole with much of the focus on the 9/11 20th anniversary services but also on sporting events. Well done to Emma Raducanu for her remarkable victory and also to Lando Norris for his P2 for McLaren at Monza. 

It wasn't such a great race for Hamilton and Verstappen... Source: The Times, Matteo Bazzi/EPA

In COVID-19 news, Israel already has its eyes on a fourth dose of vaccine in what potentially amounts to some concerning info on the long-term efficacy of the vaccines. However, in the UK, the government dropped plans to introduce vaccine passports for high capacity events like nightclubs / sporting / festivals. 

One story which I think slipped under the radar a little was this excellent piece of NYT journalism on the supposed ISIS-K takeout ordered by Biden after the deaths of 13 US troops. While this has gone unnoticed, I expect it will get a bit more traction and might add some pressure to the President and prompt an investigation or two. 

Finally, we obviously had the news on Friday (as rapidly reported by yours truly) that Apple would no longer be able to prevent developers linking to external websites for subscriptions. It's probably only going to amount to around 2% of Apple's profits (assuming it isn't challenged etc in higher courts), but it could provide a significant boost to app developers. I stand by my claim from Friday that the winner of this may well be Microsoft given how much it pays Apple for those who subscribe to Office 365 on the platform. 

Apart from that... I'm not seeing a huge amount of weekend news flow which has caught my eye. 

The Week Ahead: 

Lots of economic data coming in the week ahead as well as a fair few political events which might move the market. Also watch for news from Canada about polls for the Canadian election taking place Monday 20th (Trudeau currently trails in the polls). Then the Sunday after we'll have the German elections so lots to watch in the political space (the CDU currently trail the SPD in the polls - a Germany politics primer will follow this week). . On Tuesday we have the recall election for Governor Gavin Newsom. While he definitely has the financial firepower, it will be worth watching to see which way the political winds are blowing in California. 

Lots of things to watch on the economic calendar with CPI from US and UK, a few interesting bond auctions and also retail sales toward the back of the week. 

Source: NYT - German's Election was Laschet's to Lose - And he Might do Just That

Economic Calendar Highlights: 

Monday:

07:00 - Germany August Wholesale Price 

16:00 - US Consumer Inflation Expectations

Tuesday: 

05:30 - Japan Industrial Production

07:00 - UK Employment Data 

10:45 - Few interesting BTP Auctions (3s,7s,30s)

13:30 - Canadian Manufacturing Sales & US August Inflation 

Wednesday: 

07:00 - UK Inflation & PPIs

10:00 - Euro Area Industrial Production, Wage Growth. 

13:30 - Canada Inflation & US Export Prices, NY Empire State Manufacturing, 

14:15 - US Industrial Production for August

15:30 - EIA data 

Thursday: 

02:30 - Australian employment data

01:30 - Canadian ADP 

13:30 - US Retail Sales & Initial Jobless Claims & US Philly Fed 

Friday: 

07:00 - UK Retail Sales 

09:00 - Euro Area Current Account & Inflation Rate 

15:00 - UMich Surveys

Non-Sequitur: 

Full disclosure, I'm only with you for three of the trading days this week as I'm off to Milan on Thursday for a short reprieve before I return to university. 

So I've gone with an Italian theme today for the non-sequitur. Well... loosely. The longest pizza ever made was 1930.39m long (far more than a mile!) and was made in... sorry Italy... the United States. That's 17,700lbs of dough, 5,000lbs of tomato and 3,900lbs of mozzarella. 

Happy Trading Everyone! Have a Great Week Ahead

Quick note on AAPL

I know I don't talk individual stocks particularly often, but thought it was worth flagging a big news story tied to the largest company in the world. 

Here's the news: 

JUDGE SAYS APPLE'S CONDUCT IN ENFORCING ANTI-STEERING RESTRICTIONS IS ANTICOMPETITIVE APPLE SHARES DROP TO SESSION LOW

Apple shares are down just over 2% at the time of writing. 

What does this ruling mean in practice? 

It means AAPL no longer is able to force developers to get people to signup to apps on the App Store interface and developers can route their payment systems through to websites (where they are not subject to the AAPL 30% fee). 

What's the long-term impact? 

I mean, surely AAPL is going to appeal this and we will keep going up through the relevant courts, but even if it stands does it make a huge amount of difference? Well, maybe according to Statista 2020 App Store revenue for Apple was USD72.3bn (obviously this is not profit, although gross margins are rumoured to be around 75%+) so this could be a sizeable hit to the bottom line if this changes consumer habits drastically. But here's the thing, it's not like you could actually signup to Netflix on an iOS device, you always had to signup elsewhere then use the App. 

Much of the revenue came from in-app purchases. As I'm writing AAPL is now down only 1.6%, let's see what happens by the end .

So is this going to kill the App Store forever? Well it depends firstly on appeals (and I have a sneaking suspicion the Supreme Court (of Republican appointees) will rule in favour of Apple if it gets there), but really there is still a lot of revenue to be had from in-app purchases. 

Also worth bearing in mind the ruling helps App Developers, so theoretically could see an increase in use of the App Stores. Other thing to bear in mind, what does this imply for Google in the long-term... it also uses some similar high charging methods in its Android store. 

Who are the winners? 

EPIC obviously (UPDATE: or perhaps not... at no point does the judge order Apple to let EPIC back onto the store... the implication being it should only do so if it wants to)... perhaps less obviously look to Microsoft. A big win for Office 365. Means they probably end up retaining an extra bit of cash there. 

AAPL. I'm always hesitant so short Apple, this win for EPIC probably means they can lie low for a while and not be subject to too much scrutiny elsewhere in my opinion. Apple has been dealt its blow, its not a killer one, and what's coming for Amazon next might be far worse. 

AAPL down 2.2%. 

Have a good weekend all.

CORRECTION: This article states that Apple App Store revenue was USD72.3bn. This is actually total App Store sales, rather than revenue to Apple from the App Store. Apple takes generally 30% of this, so you can approximate the revenue as 24bn (on which there would then be a 60% + margin). 

SL hit on EURGBP: Fool me once... Shame on you... Fool me twice... Shame on Me

SL hit on EURGBP yesterday for the first time just after the ECB conference, with EURGBP falling below 0.853 for a loss of 30 pips. Later in the day, EURGBP rebounded, and I thought... let's have another pop and got long at 0.854 with a SL at 0.852. This morning I got stopped out of that too. All-in-all for a loss of 50 pips. 

I see EURGBP rising again now... and I'm tempted to have another pop, but over the weekend there's just too much risk there, plus it's always good to know when to cut your losses, and this is one of those times. 

One of my favourite clips below... I present Bush on Fool me Once: 

The Lady Isn't Tapering - After the ECB Presso

We’ve just had the ECB Presso and it certainly caused a bit of a move in the currency markets (my EURGBP trade took a bit of a hit, but I’m still in). 

The argument seemed to be that this is a recalibration of stimulus (similar to the language when they sped up PEPP earlier on). 

They’ve updated their projections for growth too and this is when the currency really started to move lower. 

The takeaway really is that Medium-Term Inflation is still seen well below target. And this is the reason why the ECB will continue to be on the dovish side. 

In terms of my long EURGBP trade, I’m still pretty optimistic as ultimately, regardless of how much Mrs Thatcher President Lagarde decides to quote, this is a tapering of purchases. Given we are going to see more government supply also coming online through the winter months, bond yields in the Eurozone could actually increase slightly more over the coming months. 

All-in-all, this is a reason for me to become a little more constructive on the EUR. 

ECB Primer - Lagarde to Speak Softly But We All Know She Carries a Big Stick

Good morning everyone. It's ECB Day although the market doesn't seem to happy about it with European Stocks dropping to their lowest levels in three weeks!

All eyes today will be on the ECB and Lagarde's Press conference at 12:45 and 13:30 (UKT) respectively. We all know that a discussion of a slowing in asset purchases is on the way, and the ECB's PEPP (Pandemic Emergency Purchase Programme) is due to end in March. Thus, there will likely be much discussion of when and how the taper will begin. 

This has important ramifications for European rates markets especially given that PEPP purchases have increased demand for a whole range of sovereign bonds. The Bund-BTP spread, a closely watched gauge of Eurozone risk sentiment which shows the difference in yield between an Italian 10y bond and a German 10y Bund, currently sits near its lowest levels around 100bps. Lagarde is unlikely to want to disturb this low level as this would have implications for "financial conditions" which the ECB monitors very closely. 

Bund-BTP Spread (107bps currently) - Source: Borsa Italiana

You can see that this spread widened dramatically in March 2020 as risk assets plunged. No doubt, Lagarde will be keen to avoid any widening which could make it more difficult for governments (particularly those at the periphery like Italy, Spain etc) to borrow. 

What is Expected Today? 

The ECB is expected to reduce its purchases a touch today to perhaps 60-70bn Euros a month (from around the 80bn a month we see currently) as the justification for providing the emergency stimulus is beginning to fade now the economic recovery is well underway. This move would signal the ECB is monitoring the situation closely and doesn't want to add too much fuel to the fire of the hot levels of inflation we are currently seeing. 

Likewise, with economic growth having been faster than expected in Q2 at 2.2%, there is less of an incentive for the ECB to maintain these "extraordinary purchases". 

On the inflation narrative, Lagarde is likely to stick to the transitory script, but no doubt some of the hawks in the ECB (see graphic below) may start to challenge this given inflation in the Eurozone is at the hottest in 10 years at 3%. 

Source: ITC Markets

So, if the central bank does decide to slow the pace of asset purchases today, there is likely to be a slew of commentary from Lagarde that this is (to paraphrase Churchill), not the end of stimulus, not even the beginning of the end of stimulus, but it is perhaps, the end of the beginning of stimulus. 

What's the Trade: 

If we see the tapering of asset purchases today, I'd become a lot more constructive on EURUSD in the near-term, although much still depends on the US in that equation. I'd therefore rather play this versus GBP and Long EUR-GBP. 

Looking at the charts, we can see the RSI on the hourly has moved into oversold territory as we've seen an aggressive move down in EURGBP in the last few hours. I therefore think the balance of risks is to try a tentative long with a tight SL. 

I also favour this trade as I am permanently bearish on GBP given the mounting risks from trade disruptions as a result of Boris' intransigence about HGV drivers from the EU. 

Initiate Trade: BUY EURGBP at 0.856, TP 0.861 and 0.864 in extension, SL 0.853