Market Quick Take - May 22 2020 Market Quick Take - May 22 2020 Market Quick Take - May 22 2020

Market Quick Take - May 22 2020

Macro 3 minutes to read
Picture of Steen Jakobsen
Steen Jakobsen

Chief Investment Officer

Summary:  The US equity session ended weaker yesterday and was down further overnight after Chinese leadership abandoned GDP targets and announced a new security law for Hong Kong at the start of the national party congress. The dip in risk sentiment saw the US dollar consolidating sharply to the strong side and crude oil prices erasing recent gains.

What is our trading focus?

  • US500.I (S&P 500 Index)and USNAS100.I (NASDAQ 100 Index) – stocks are in steep retreat after yesterday saw both to these major US equity indices looking at the highs for the cycle but unable to sustain the rally. Crucially for the technical outlook, the broader S&P500 Index has never crossed above the key resistance zone from the 61.8% Fibo retracement near 2930 up to the 200-day moving average, which is now dipping down below 3000. 
  • OILUKAUG20 (Brent crude) and OIL:xpar (European oil & gas) - Brent crude is down 4.5% today as China skips its GDP growth target putting renewed focus on uncertainty on oil markets. Despite this setback we still see relative value through long oil majors
  • AUDUSD – the AUDUSD exchange rate rose to its highest levels for the cycle mid-week, but the new highs have so far been brushed back as commodity prices dropped and as risk sentiment, much of it centered on developments in China, has suffered a setback. A rejection of the price action above 0.6570 and close below perhaps 0.6450 would suggest that a large consolidation back lower is the side of least resistance.
  • BABA:xnas (Alibabaand CQQQ:arcx (Chinese technologystocks) - the largest Chinese company listed on the US exchange, Alibaba's shares came within5% of all-time highs this week before retreatingand the price action here could be interesting for measuring the market’s fears of a delisting, given the US Congress’ recent attentionon Chinese companieslisted on US exchanges. The Nasdaq exchange has taken action to delist Luckin Coffee and Baidu(BIDU:xnas)announced yesterday that’s planning to leave the Nasdaq exchange. A new bill on foreign companies listed in US capital markets is driving the uncertainty around Chinese listings.
  • USDCNH – with this latest round of US-China tensions and the risk that any new wave of weaker risk appetite triggers USD strength, the focus on the important USDCNY (and offshore USDCNH) exchange rate could quickly intensify, particularly if the 7.20 area comes under pressure, which would point to China allowing its currency to devalue. The past has shown that the market finds CNY volatility unsettling.
  • IQQB:xetr (Brazilian equities) - despite COVID-19 related news continues to worsen in Brazil the equity market has stabilised and this week’s good sessions have made us a bit confident in our contrarian view from last week establishing a long position in Brazilian equities. The key risk is a flight from emerging market countries in general and stronger USD.

What is going on?

Announcements from China National Party Congress meeting spook markets as the National Party Congress gets underway.The initial announcements coming from the party meeting set to continue over the coming weekshow that the Chinese government is set to abandon any GDP target due to the uncertainties caused by the Covid19 outbreak, that it will seek to write a new “security law” directly into Hong Kong’s Basic Law and thus bypassing the local legislature. Details are few on the nature of this new security law, but Hong Kong’s Hang Seng index was some 4.5% lower in late trading. China also announced it would seek to follow the terms of the US-China trade deal agreed back in January.


US-China tensions are rising as the US Senate is looking at a bill with bipartisan support to prevent Chinese companies from listing on US exchanges unless they certify that they are not controlled bythe Chinese government and allow audits by US authorities. Another Senate bill will look to censor Chinese individuals over claims of Chinese interference in Hong Kong.


US Weekly Initial Jobless Claims were higher than expected last week – at over 2.4 million and continuing claims rose above 25 million for the first time, troubling signs that the pace of US job losses remains high even as many regions of the US move to open up from Covid19 shutdowns.


The Bank of Japan announced a new lending programme for SME’s worth some JPY 30 trillion (around USD 280 billion) to help prevent smaller and medium size companies from failing due to the Covid19 crisis. It’s other interest rate and asset purchase policies were unchanged.


Fitch is catching up to Australia’s dire situationin a report citingAustralian household debt, at 186.8% of disposable income, is among the highest of 'AAA' rated sovereigns and poses an economic and financial stability risk. In the event that the current shock proves more persistent or leads to a structurally weaker labour market households' ability to service their debt could become impaired.

On the speculative retail investor flows we have previously pointed to via Robinhood positioning comes some more data from Envestnet Yodlee. According to theirdata aggregation, “Trading stocks was among the most common uses for the government stimulus checks in nearly every income bracket”.  


What we are watching next?

How we close the week of trading ahead of a three-day weekend for the US (markets closed Monday for Memorial Day) after intra-week strength this week in global equities and many EM currencies and pro-cyclical commoditiesAfter a week that saw robust strength in risky assets, currencies and some commodities linked to hopes for a global growth rebound, the quality of this week’s closing level looks important for setting the tone and the level of concern as the market ponders the risk of a deteriorating US-China relationship.


Economic Calendar Highlights (times GMT)

  • 1130 – ECB Publishes Account (Minutes) of latest meeting – for Europe, the focus is more on existential issues and the magnitude of coming fiscal programmes.
  • 1230 – Canada Mar. Retail Sales – Canada is slow to release this particular data series, but could be interesting to measure versus the size of the shock in US sales for the same month (down 8.3%)

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