Market Quick Take - August 24, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  US equities and the US dollar ended last week on a strong note and the Monday session in Asia continued the good cheer. At the weekend, US President Trump pushed for a COVID-19 treatment and for fast-tracking a UK vaccine candidate. This week, our attention turns to the state of US election polling as the Republican National Convention starts today and we watch for the latest signals from the Powell Fed.


What is our trading focus?

  • S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – both equity futures are pushing higher into new territory this morning with the S&P 500 futures above 3,400 establishing this round number as interesting psychological support level. The rally in US equities is still narrow driven by a small group of large US technology companies setting the market up for a potential sharp reversal on the right catalyst. We urge traders to tighten risk limits at current levels as the US equity market is clearly diverging from other equity indices.

  • STOXX 50 Index (EU50.I) – European equities are still struggling to find a positive narrative as COVID-19 cases are rising in multiple countries and the EUR remains elevated impacting the export sector. The large equity market concentration in financials and capital-intensive cyclical industries is holding European equities back relative to US equities. In STOXX 50 futures the 3,287 level could be the trigger for an upward move today and the 3,250 level is clearly the support level.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - finished last week close to unchanged as the correction/consolidation continues. Friday’s weakness was led by a stronger dollar in response to stronger-than-expected U.S. economic data. Overall, however the impact was limited due to renewed weakness in US ten-year real yields as the rate dropped back below –1%. Focus in the week ahead will be Trump’s virus treatment news and Powell’s speech at the virtual Jackson Hole symposium. Key support remains ahead of $1900 while resistance has been established at $2015.

  • Brent Crude Oil (OILUKOCT20) and WTI Crude Oil (OILUSOCT20) - may face a volatile week with U.S. hurricane threat being offset by a virus resurgence in Europe and Asia. Two hurricanes are forecast to hit the US Gulf simultaneously for the first time in recorded history. Tropical storm Marco and later in week Laura are both expected to become at least category 1 hurricanes. Production and refinery capacity as well as export and imports are all likely to be impacted. Energy firms have already started to shut down oil production from a region that accounts for about 16% of crude and 2.5% of U.S. natural gas production. WTI crude oil remains stuck below $43/b, a level that has been rejected almost daily for the past two weeks while Brent remains rangebound between its 50-day moving average at $43.40 and the 200-day at $46.15.

  • EURUSD the USD firmed up last week and rejected new lows in many USD pairs, among those EURUSD, where we have noted record long speculative positioning that only eased slightly last week. Last week’s PMI data suggested European economic improvement may be slowing as COVID-19 outbreaks across the Euro Zone frustrate opening up efforts. The technical situation suggests that long positions could be vulnerable on a break below 1.1700, an area that twice served as support. Looking lower, 1.1625 is the first possible support area, while stronger trend support comes in near 1.1500-1.1450.

  • AUDUSD the AUDUSD recovery from the March lows has really run out of steam and AUD weakness is showing up in some of the crosses. The MACD indicator for AUDUSD posted a lower high with last week’s new price high above 0.7200, which was rejected as the USD rallied to close the week. The technical situation will quickly turn pivotal to the downside if the USD strength persists, with the major 0.7050-0.7000 pivot the chief focus. AUD has found less support over the last three trading days from iron ore price developments, as Chinese futures for iron ore traded to a one-week low overnight, rare weakness after the strong rally off April lows.

What is going on?

  • Trump announces COVID-19 treatment push, vaccine fast track - after blaming the FDA and others for delaying vaccine development for political reasons, US President Trump announced at the weekend that the FDA would open for treatment of COVID-19 patients with blood plasma from donors who have had the virus and recovered. He also will try to have a UK vaccine candidate fast-tracked for use in the US.

  • Agriculture ETF’s DBA:arcx, AIGA:xlon and RJA:arcx - The weekly Commitments of Traders report released on Friday with data covering the week August 18 saw the net-long across 24 commodity futures jump by 22% to 1.6 million lots, a 24-month high. The bulk of the buying was led by a continued and rapid accumulation across the agriculture sector. Surging Chinese demand for key crops, weather concerns and the weaker dollar have all supported a change in sentiment towards a sector that has been weak for many months. Also, this week on August 27, the International Grain Council will issue its latest global crop forecasts with the market looking for any signs of supply concerns to support the rally. We will be watching the mentioned ETF’s for signs of a breakout to the upside.

What we are watching next?

  • US Republican National Convention and US presidential election poll developments - the US Republican Party Convention starts today and wraps up Thursday with Trump’s acceptance speech. The theme of the party platform is “Renew, Rebuild, Restore” as the Republicans and President Trump try to portray the Democrats as wanting to destroy, “defund” and dismantle the country with soft on crime policies and a radical social agenda, as well as having “played politics with the pandemic.”

  • This week’s Kansas City Fed symposium to see discussion of Fed’s policy review – normally taking place in Jackson Hole, Wyoming, this year’s virtual Kansas City symposium on Aug 27-28 will include Fed Chair Powell discussing the results of the Fed’s policy review, likely to include the already heavily discussed Average Inflation Targeting (AIT) which would allow the Fed to remain slow to respond to rising inflation in order to achieve an average rate over time of 2% after missing that level for years. Powell could also comment further on the Fed’s attitude toward yield-curve-control.

  • Chicago Fed National Activity Index Jul today - is an important measure of the overall US economy as it tracks 85 indicators on the economy and is the established key barometer inside the Fed. While there is still a lot of noise in economic indicators this broader measure should provide a better picture of the US economy in July.

Economic Calendar Highlights for today (times GMT)

  • 0800 – Switzerland Weekly Sight Deposit Data
  • 0130 – Australia Weekly Payroll and Wages data

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