Inflation will not moderate, it is a runaway train
Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
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Market Quick Take - July 30, 2020
John Hardy
Head of FX Strategy
Summary: The FOMC meeting last night produced a statement with few changes and the Powell conference highlighted the important of fiscal spending and mentioned that the high frequency data on the economy showed signs of a slowing pace of the recovery. Market reaction was neutral. Today, we look forward to the highlight of the earnings season as the big four of Alphabet, Amazon, Apple and Facebook are set to report after the US close today.
What is our trading focus?
US500.I (S&P 500 Index)and USNAS100.I (NASDAQ 100 Index) – the market tried to rally in the wake of the FOMC statement and Fed Chair Powell press conference yesterday, but the move failed to take resistance at 10,768 in the Nasdaq 100 (arguably the last level ahead of the 11,000 top). In the S&P 500 Index, the move and close above the 3,250 level was a strong showing from the bulls, but that level was not held overnight and let’s see how the index fares on the other side of huge earnings reports today after the close (see below).
DAX.I (German DAX Index) - the German DAX index continues to hold its breather, as bears have yet to press their case lower after the index failed to maintain the price action above the big 13,000 level last week. We highlight the 21-day moving average (yesterday at 12,780) as a key tactical level and then the bigger focus lower at perhaps the 200-day moving average, currently at 12,205. The Volkswagen dividend cut may be behind the DAX' exceptionally poor opening this morning.
VOW:xetr (Volkswagen) - the German carmaker annnounced a pretax loss of EUR 1.4 billion and revenue down 23% year-on-year in Q2. Importantly cut the dividend to 4.86 per share from 6.56.
SHOP:xnas (Shopify) - a favourite of the speculative community recently, this stock has one of the most aggressive valuations relative to revenue and earnings in a very frothy market for this type of fast-growing company, which provides cloud-based e-commerce solutions (thought to have especially bright prospects in this time of COVID-19). Despite reporting (after the close on Tuesday)a massive beat of revenue expectations, at $714M vs. $512M expected and a huge net income beat, the shares fell for most of the session after opening over 10% higher. Still, the shares managed a positive close over 6.5% and barely at an all time high.
KODK:xnys (Eastman Kodak) - the price exploded yesterday and is up over 1,000% from levels at the beginning of the week in this long-suffering former Dow Jones Industrial Average component after the Trump administration announced that the company would be extended a $765 million loan to produce generic drug ingredients, an obvious response to the realization during the COVID-19 crisis that US is reliant on foreign sources for many basic drugs.
XAUUSD (Spot Gold) and XAGUSD (Spot Silver) - spot gold retested the highs of the cycle near 1980/oz. Yesterday over the FOMC meeting, with erratic price action during the Powell press conference, particularly in jumpy spot silver, a warning to traders in setting leverage and risk levels. The psychological barrier is perhaps 2,000/oz. For gold, while silver seems a bit more bogged down in a range centered on 24/oz after extreme gyrations earlier this week that may have spooked market participants.
GBPUSD – sterling reached a major milestone in rallying to the 1.3000 level versus the US dollar and over the FOMC preicnss conference last night before easing slightly lower. Sterling also pulled higher versus the euro and away from an important breakdown level versus the single currency. We’re a bit uncomfortable calling for continued follow through higher for sterling, given the UK’s weak performance economically and no real developments to support the price action. Let's see if the 1.3000 level serves as resistance for now in GBPUSD, with initial support down around 1.2800.
USDJPY – the initial attempt lower toward the pivotal 104.50 area – a major one stretching back to four tests over more than two years – failed to stick, and the pair sloshed back above 105.00 in the wake of last night’s FOMC meeting. The pair has recently broken below the locally important 106.00, the level that keeps bearish hopes alive for a challenge lower still and has added to the sense that the US dollar is in a broad rout.
What is going on?
FOMC statement and Powell Press conference late yesterday. The new July FOMC statement saw very fewchanges, with the addition of the sentence “The path of the economy will depend significantly on the course of the virus.” the chief change relative to the June statement, an obvious reaction to the concerns linked to the resurgence of the COVID-19 outbreakin the US. During the Powell press conference, Powell once again made clear – and this is critical – that the Fed “has lending powers but not spending powers”, a nod that it can only extend liquidity and loans, not directly drive demand, which is the domain of fiscal stimulus, critically important at this time with the Congressional debate over the size and shape of further stimulus with many of the initial measures to expire at the end of this week.
US coronavirus relief bill talks ended yesterday with no progress and seeming irreconcilable differences with the White House and Democratic leaders far apart on a solution as some benefits – most notably the $600/week federal unemployment benefit, is set to expire this week. Any extension of the stand-off beyond a week or so could rapidly begin to wear on market confidence.
World COVID-19 news continues to weigh - with record daily death numbers for the US states of Texas and California, Australia setting a new high for number of new cases, Brazil doing likewise and recording a record daily death toll. The UK is expected to bring new quarantine requirements for more EU countries after recently doing so for Spain.
House politicians get tough on Amazon, Alphabet, Apple, and Facebook CEOs, all of whom testified before the House Antitrust Subcommittee yesterday, and all of whom, by coincidence, are set to report earnings after the close today. The lines of questioning make clear that these giants are under attack in the long run from the authorities, but that anti-trust legislation is woefully out of date and would need a revamp to bring these companies to heal or break them up. The US justice department will likely soon announce charges against Google for abusing its near monopoly in online advertising industry, according to New York Times sources, and the Federal Trade Commission is preparing to question Facebook CEO Mark Zuckerberg to testify under oath.
What we are watching next?
Biggest US earnings day of the week today: After the close today the market will witness the enormous haul of earnings reports from Facebook, Apple, Google and Amazon, possiblysetting the tone for the final trading day of the week and month tomorrow.
First Q2 GDP estimates from Germany and the US today– these will give us a sense of the scale of the economic impact, even if the market is not likely to react to surprises in either direction. The Germany economy is expected to have dropped some 9% QoQ even though it is a far less service-intensive economy and had a shorter period of quarantine lockdowns than other nations. The US Q2 estimate is expected at an annualized –34.5% rate.
Economic Calendar Highlights for today (times GMT)
- 07:55 – Germany Jul. Unemployment Change / Unemployment Rate
- 08:00 – Germany Q2 GDP Estimate
- 09:00 – Euro Zone Jul. Confidence Surveys
- 09:00 – Euro Zone Jun. Unemployment Rate
- 12:00 – Germany Jul. Flash PMI
- 12:30 – US Q2 GDP Estimate
- 12:30 – US Weekly Initial Jobless Claims
- 14:30 – US Weekly Natural Gas Storage Change
- 22:00 – New Zealand Jul. ANZ Conumer Confidence Survey
- 23:50 – Japan Jun. Jobless Rate / Industrial Production
- 01:00 – China Jul. Manufacturing and Non-manufacturing PMI
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