Market Quick Take - August 25, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  US equities saw a choppy session yesterday, particularly the mega-caps, as the Nasdaq 100 posted strong new highs on the day only to give up all those gains intraday and then close the day slightly higher. The broader market saw a more positive session, with the headlines crediting US-China trade dialogue and vaccine hopes for the positive mood, which continued overnight in Asia


What is our trading focus?

  • S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – the normal divergences in US equity markets were turned on their heads yesterday, as the Nasdaq 100 index wobbled a bit relative to the broader market even as it managed to close 0.6% higher at new record level. The S&P 500 index was more consistently bid on the day and gapped at the open to close about 1% higher and to a new all-time high well clear of 3,400. For the cash index, there is now a chart gap back down to the Friday high of 3,399.

  • STOXX 50 Index (EU50.I) – European equities finally shook off their weak tendency over the last seven trading sessions and rallied hard yesterday to start the week. This took the STOXX 50 Index back to a close above the 200-moving average (currently 3,318) that has been attracting the price action for since early June. There is still some work to do for the price action to break out of the local range and approach the post-COVID meltdown high of 3,451.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - remain rangebound with supporting weakness in U.S. real yields, a weaker dollar and another record day on Wall Street being somewhat offset by easing tensions between the U.S. and China. This after Washington and Beijing reviewed their trade deal and a U.S. statement said that “Both sides see progress”. Focus in the week ahead will be the Republican National Convention and Powell’s speech at the virtual Jackson Hole symposium. Key support remains ahead of $1900 while resistance has been established at $2015.

  • WTI Crude Oil (OILUSOCT20) & Brent Crude Oil (OILUKOCT20) - both traded within a one-dollar range yesterday as tropical storm Marco was downgraded while Laura gathered strength and is expected to become a hurricane before making landfall on Thursday. Most of the gains were seen in RBOB Gasoline (GASOLINEUSSEP20) as refinery closures on the Gulf could potentially shut in more than 1 million barrels a day of capacity. The front month contract traded $138,44 overnight, the highest level since early March. WTI crude oil meanwhile has yet to break above $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 traders seem to be holding their collective breath, waiting for the next move here after EURUSD backed up yesterday to a 1.1850 but quickly found sellers – the key technical triggers look to be a close above 1.1900 or below 1.1700 to establish direction as we await an important Powell speech Thursday (see below) Tactical traders should note that the winding price action has seen 1.1754 and 1.1850 established as local lows and highs.

  • AUDUSD the AUDUSD chart continues to tease traders as we have noted somewhat bearish momentum divergence over the last several weeks (new highs in price while the MACD, for example, posts lower highs) but really, the AUDUSD pair has been locked in a choppy, narrow upward sloping channel for over a month since breaking above the critical 0.7000 area. This Thursday’s speech from Fed chair Powell is the obvious key for the USD side of the equation, while support for AUD from commodity prices is eroding quickly after Chinese iron futures traded at an almost two-week low overnight.

  • Tesla (TSLA:xnas) - very volatile session yesterday with an opening gap due to an aggressive price target increase by sell-side analysts at Wedbush to $3,500 but then a sell-off that took the shares down 9.5% from the opening price before ending the session 1.5% lower from the day before. The increased volatility comes ahead of Friday’s split but also a lingering S&P Indices decision whether to include Tesla into the S&P 500 Index or not. Technically with four quarters of earnings it can be included but the index committee might judge the earnings quality to still be too low.

What is going on?

  • German doctors say tests show Russian opposition leader Navalny was poisoned – and German Chancellor Merkel has called on Russia to bring the guilty parties to justice. USDRUB closed at a new three-month high on Friday, perhaps in part on renewed sanctions fears also linked with the situation in Belarus, but the price action this week has so far been bottled up.

  • India to drop Huawei from its telecom networks - in a sign of a hardening division between US allies and China, India made the announcement that it will phase out Huawei equipment from its telecom networks, although there will be no outright ban.

  • US-China discussed the status of the trade deal, with the US claiming progress on the deal - although China is still far short of the purchase targets established in the deal and would have to accelerate purchases to meet the terms agreed in mid-January of this year.

  • There was a reshuffle of the Dow Jones Industrials index in biggest update since 2013, with ExxonMobil (XOM:xnys), Pfizer (PFE:xnys) and Raytheon (RTX:xnys) dropped from the index and replaced with Salesforce.com (CRM:xnys), Amgen (AMGN:xnas) and Honeywell International (HON:xnys). Part of the reason for the move is Apple’s four-for-one stock split, which will reduce the company’s weight in the average.

  • Chicago Fed National Activity Index for July disappointed yesterday showing only 1.18 for July versus 3.70 expected (zero is the estimated long-term trend growth in the US economy) while June was revised up to 5.33 from previously 4.11. These numbers highlight at strong momentum m/m going into the summer period and then a considerable slowdown in July as the rising COVID-19 cases impacted demand.

  • Today’s earnings releases – Autodesk (ADSK:xnas), Bank of Nova Scotia (BNS:xtse), Medtronic (MDT:xnys), Salesforce (CRM:xnys) and Intuit (INTU:xnas). From a market impact perspective Salesforce will get the most attention with its $188bn market capitalisation and high growth expectations.

What we are watching next?

  • US Republican National Convention and US presidential election poll developments – as noted in previous Quick Takes, the Republicans started last night with a message leaning heavily on warning against the Democrat’s platform. US President Trump has one of the worst lags in the polls ever measured for a president running for a second term.

  • 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.

Economic Calendar Highlights for today (times GMT)

  • 0800 – IFO Survey Aug.
  • 1400 – Conference Board Consumer Confidence Aug.
  • 1400 – New Home Sales Jul.
  • 1400 – Richmond Fed Manufacturing Index Aug
  • 20:30 – API weekly oil inventory report

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