Market Quick Take - November 20, 2020

Macro 6 minutes to read

John Hardy

Head of FX Strategy

Summary:  Markets are rather quiet and mixed as investors scratch about for catalysts ahead of what historically is one of the strongest periods seasonally for equities from now and into year-end. US Treasury Secretary Mnuchin has moved to end key Fed facilities that helped prop up the US corporate bond market during the Covid-19 pandemic, even if few of the funds were actually deployed.


What is our trading focus?

  • Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities suffered in late hours yesterday on news that US Treasury Secretary Mnuchin will end some emergency programmes by 31 December. However, equities have shrugged it off already and recouped the losses with Nasdaq 100 futures just below 12,000 delivering a flat week. The broader market in S&P 500 is down for the week and struggling a bit more this morning with key support level in today’s session being 3,542.

  • Bitcoin EUR (BITCOIN_XBTE:xome) - the Bitcoin (XBTUSD) rally continues with the cross trading around 18,200 getting closer to the old all-time-high at 19,511 in December 2017. Bitcoin is benefitting from renewed talks about inflation and debasement of currencies with several well-known institutional investors arguing for having some Bitcoin in the portfolio.

  • AUDUSD – still watching and waiting here as this is a currency pair that perhaps best tracks the “reflation trade” narrative, or the expectation that the global economy can begin to eventually look beyond Covid-19 (and effectively already can now for much of Asia) and that the stimulus provided will drive inflation and commodity prices higher. The AUDUSD has traded in a very narrow range for two weeks now as bulls wait for the signal that a 0.7400+ break is unfolding that can shift the focus perhaps all the way to 0.8000+ if the USD is set for a major weakening move. On the flip-side – declining US long yields are a confusing factor here and if this represents a concern on the growth outlook, the reflation trade may yet falter. Still, a breakdown in AUDUSD only looks a threat if the price action retreats below 0.7200.

  • USDTRY – the Turkish lira gained further yesterday after the central bank hiked rates 475 basis points to 15.00% as widely expected, and simplified its confusing variety of rates, with new central bank chief Agbal promising that all funding would be via the main policy rate. The lira rallied about two percent by the close of yesterday’s trade and is more than 10% higher from its weakest level earlier this month, now offering a compelling amount of carry if Turkey’s outlook stabilize and domestic and foreign actors feel comfortable re-establishing exposure to the currency.

  • US Treasury rally as Treasury asks the Federal Reserve to return Stimulus funds (10YUSTNOTEDEC20). Investors begin to cover their short bond future positions as they understand that uncertainty might weight on US Treasury yields. News that the Treasury wants unused funds from Fed provokes a run to safety. It is clear that until Trump contests the election and tries to sabotage the next administration, safe heaven will prevail.

What is going on?

  • US Treasury Secretary Mnuchin will end some emergency lending programs - that were set up during the pandemic to provide emergency loans to companies and local governments and has asked the Fed to return $455 billion in unused funds from these programs that can then be reappropriated by Congress. The canceled programs will run out at the end of the year and include the one set up to buy corporate debt. While little of the money for that particular fund was actually used, it did backstop the entire corporate credit market and encouraged a rush of new debt issuance. Mnuchin is extending other facilities, like the paycheck protection program liquidity facility for another 90 days. The Fed is against the Treasury Secretary’s moves and some eye this as a move to hamstring the incoming Biden administration with less firepower.

  • US weekly initial jobless claims came in higher than expected, at 742k vs. 700k, a distinct disappointment after the big drop in claims in the prior week. This latest claims number is still above the pre-Covid-19 record high, showing that the labour market is far from normalized in the US. While the weekly continuing claims fell again by a large amount, there are other signs of trouble, such as 4.4 million claiming Pandemic Emergency Unemployment Compensation, a federal benefit program providing extra weeks of benefits for those who have exhausted their right to state benefits. And concerns are growing that widening lockdowns will put renewed pressure on especially service industry jobs.

  • Cocoa, coffee and platinum are the top performing commodities this week while natural gas, silver and gold scrape the bottom with politics, weather and vaccine news the key drivers behind these developments. New York traded cocoa surged 12% after Hershey took to the unusual step to source large amounts from the exchange instead of the physical market after West African nations added a hefty premium for their beans. Coffee 10% higher on Brazil dry weather worries while platinum rallied on the outlook for a tighter market. Also helped by the vaccine news which send precious metals in the opposite direction. Finally, natural gas slumped 12% with NOAA seeing demand-killing warm weather into early December.

What we are watching next?

  • No positive headlines on EU budget from yesterday’s EU leader videoconference - on the subject of the important 2021-27 budget and accompanying recovery package after Poland and Hungary recently vetoed the budgets in protest over “rule of law” requirements that they deemed a threat to their sovereignty. German Chancellor Angela Merkel will lead further negotiations. The video conference had plenty of other issues on its hands, like Covid-19 testing, travel restrictions and relations with Turkey, Brexit no-deal contingencies and more.

  • Widening lockdown threat in the US. With little leadership from Washington and a tradition anyway for huge policy differences among US states, the threat is growing of regionalized lockdown in cities and states across the US as the daily case count has risen to close to 200k/day on two recent days in the US and hospital ICU’s are nearing capacity in some jurisdictions. California imposed a 10 p.m. curfew on most of its residents and the CDC discouraged traveling for next week’s Thanksgiving holiday, traditionally a holiday associated with heavy traveling.

  • An eventual Trump concession? No sign that Trump is giving up his fight to overturn the US election result, but the state of Georgia ended its hand vote recount, which upheld the result that Biden had won the state. This further narrows Trump’s menu of places to challenge the election results. Pennsylvania and Michigan, two other states with very close wins for Biden, are expected to certify their results as soon as Monday.

Economic Calendar Highlights for today (times GMT)

  • 0815 – ECB’s Lagarde to Speak
  • 1300 – ECB’s Weidman to Speak
  • 1330 – Canada Sep. Retail Sales
  • 1330 – Fed’s Kaplan, others to speak

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.