Head of FX Strategy
Summary: The Nasdaq 100 closed yesterday at a new record high and cleared 11,000 on the close for the first time after two prior tests. The S&P 500 posted its own new post-virus meltdown high as well, and Europe bounced back strongly from its recent weakness as the market pins its hopes on new US stimulus arriving quickly. Gold eked out marginal new record highs while safe haven yields backed up from near three-month lows.
What is our trading focus?
S&P 500 Index (US500.I)and NASDAQ 100 Index (USNAS100.I) – US equities ended on a positive note, with the Nasdaq 100 Index clearing the 11,000 level on the close for the first time ever after two prior attempts through this level. The broader market was also strong with the Russell 2,000 index likewise posting a new local high and the S&P 500 finally clearing the 3,284 prior highs yesterday. Price action is a bit more muted, while the VIX remains stubbornly above 23.50, suggesting that traders remain concerned that volatility can spike afresh.
DAX.I (German DAX Index) - European equities shook off their recent slide with a stsrong rally yesterday, with the DAX rising over 2.5% on the session yesterday, erasing a good portion of the recent sell-off, though the index still finds itself well below the pivotal 13,000 area . A softening in the strong euro trend has helped European bourses across the board, but European equities are in a different technical situation from US counterparts, where major indices are at local highs.
Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - gold was bid to new record highs yesterday, but the price action lacked conviction and the precious metal is trading below the intraday high of 1981 from a week ago. Spot gold is technically overbought and has yet to suffer a consolidation of any magnitude since back in early June. Round numbers are likely the focus on any consolidation and the 2,000/oz level is clearly the upside psychological resistance. Silver remains bogged down in the range, with a local range between 24and 25 capturing most of the price action.
Natural Gas (NATGASUSSEP20) - Natural Gas spiked yesterday by the most in months – taking the price over 30 cents higher and above 2.00 for the first time (for the spot month)since early May – the intrasession highs overnight were the highest since January. The strength of this rally and the reversalsince the late June lows suggests that the cycle lows may be in for Natural Gas. Flows to US export terminals are rising and the pace of weekly rises in storage have slowed in recent weeks, while shale gas production has plummeted in response to weaker demand during the virus crisis.
AUDUSD – a key USD pair we are focusing on for signs of a broadening USD comeback as the pair is so close to the pivotal 0.7050-0.7000 zone that was recently cleared on the way up (a level with technical significance stretching back to 2018. A failure of this area to hold would represent a significant setback for the bulls in this pair and USD bears more broadly and possibly point to retrenchment back toward 0.6700, the 200-day moving average.
USDJPY – the bounce in USDJPY has taken on more of a full reversal status after the pair probed back above 106.00, a key level that was broken on its recent slide lower. If equities continue higher, but especially if we have found a cycle low in long yields for the moment, the JPY may find itself under further pressure and USDJPY could cement its reversal with a close above 106.50, which could eventually open up for exploration of the range higher toward 110 and beyond.
What is going on?
Tone of US stimulus talks improving, according to White House and Congressional officials – the latest reports are very short on details, but US Treasury Secretary Mnuchin sounded open to a bigger deal than the original $1 trillion Republican proposal and Democratic Senate leader Schumer likewise made positive comments on the status of talks, while other stories emerged that the White House would somehow try to push through new stimulus via executive action. One of the key sticking points is Trump’s accusation that Democrats in Congress want to bailout local governments run by Democrats.
Australia’s reserve Bank announced a resumption of QE to keep yields in line with its target rate, while keeping its 0.25% policy rate and 3-year yield target of 0.25% unchanged as expected. RBA governor Lowe projected that the official unemployment rate could rise toward 10% later this year before falling to gradually to 7% over the next couple of years. The Australian dollar was marginally firmer in the wake of the news.
What we are watching next?
Where’s the next round of US stimulus? This is the still the most important question hanging over US and global markets this week, as many benefits of the initial round of US stimulus expired last Friday, most importantly the $600/week federal unemployment benefit. As noted above, the latest noise from both sides is that talks are amicable, but the stakes are high here less than 100 days before Election Day on November 3.
Turkey and the Turkish lira – we watch the Turkish lira with considerable interest over the next weeks and couple of months as the currency recently dropped to record lows versus the euro, while the Turkish authorities are clearly defending a ceiling of 7.00 in USDTRY. The country has mobilized enormous efforts to keep the lira from weakening and has unusual “net negative reserves” as it dips into domestic savers’ USD holdings to defend the currency and has stimulated the economy with easy credit in hopes that a post-COVID-19 rebound will arrive swiftly.
Economic Calendar Highlights for today (times GMT)
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
