Market Quick Take - October 5, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  Markets are trying to start the week on a more positive note after a weak session Friday, perhaps as US President Trump is said to be on the mend from his Covid-19 infection, although some confusion about his condition remains on conflicting reports from his doctors. Today we have a look at September Services PMI from around the world as new virus restrictions have weighed on the case count resurgence.


What is our trading focus?

  • Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I): Friday’s session saw notable contrast in the closing levels for the tech-heavy Nasdaq 100, which closed near the lows of the day and the S&P 500, which generally clawed back some of the lost territory from early in the session. Nothing definitive in technical developments yet, but the Nasdaq 100 technicals look a bit more precarious as the attempt at new local highs above 11,540 was beaten back in Friday’s session. Both indices are perched near the key 21-day and 55-day moving averages (11,240 for Nasdaq-100 and 3,340 for the S&P500) as the shorter moving average is crossing below the longer one in today’s pre-market.

  • GBPUSD and EURGBP – as we await further developments in the ongoing Brexit negotiations after Boris Johnson’s video conference with EU Commission president Von Der Leyen on Saturday failed to move the two sides any closer to the “landing zone” (basic agreement on the outline of post-Brexit trade and other terms) for a deal that would allow a “tunnel” period of negotiations to hammer out details. The two sides agreed to intensify efforts, but time is running short, although the market is looking hopeful for a deal, as GBP perches near the 0.9025-00 pivot zone in EURGBP and not far from the pivotal upside level of 1.3000 in GBPUSD.

  • AUDUSD - an RBA meeting tonight is not generating widespread anticipation of any policy shift, although there had been some noise recently on the prospects of a small additional cut to the current 0.25% policy rate. Governor Lowe has opined that he would like the Australian dollar lower but didn’t seem to indicate any urgency to do anything about it. Some key commodity prices prominent in Australia’s export mix have suffered weakness recently, but the AUDUSD has held in above 0.7000 and is now knocking on the door to the key 0.7200-50 area, with a rally and close above this level indicating that the downside threat has likely been averted for now.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - both showed a lackluster performance on Friday despite the threat to President Trumps health and a shaky U.S. employment report sent another warning sign, that the metals are still consolidating. Despite multiple sources of uncertainty, the (lack) of follow-through buying above $1900/oz highlights the potential need for a weaker dollar and renewed focus on the threat of inflation before the rally can continue. We maintain a positive outlook but also accept that the market is currently not receiving enough oxygen to take it higher. Support at $1882/oz with a break raising the risk of a deeper correction to the recent low at $1850/oz.

  • WTI Crude Oil (OILUSNOV20) & Brent Crude Oil (OILUKNOV20) - have both bounced following the biggest weekly drop since June as the market focus on an apparent improvement in the health of the US president than rising supply from Libya and concerns about a sustained recovery in consumption. The current range bound trading behaviour highlights a market that remains torn between short-term weakness against the expectations for a recovery, the timing of which, however, continues to be delayed. Key area of resistance in Brent remains the band from $42.5/b to $43.25/b while support continues to be found towards $39/b.

  • Italy 10-year sovereign (10YBTPDEC20). Following weaker than expected consumer prices in Europe, it will be crucial to understand whether more stimulus is in the ECB's plans. If that's the case, we expect Italian BTPs to price higher as it is more likely that the country will receive more aid to slow down deflationary economic drags. In the short term, Italian sovereigns' yield might dive towards zero, we believe that in the long run, they will rise amid political uncertainty and unsustainable debt burden.

What is going on?

  • Confusion about US President Trump’s condition.  According to some headlines, Trump’s doctors are upbeat and could look to release him from the hospital as early as today. But conflicting reports on his receiving oxygen and other details, including the aggressiveness of his treatment regime, are sowing confusion on the status of his health. 

  • The latest US presidential polls show Biden’s lead widening or do they? – at least two new polls taken after the Presidential debate and before Trump’s positive Covid-19 test showed Biden ahead by a record margin of 13-14 points, although one other poll taken in the same time frame, the IBD/TIPP poll (which predicted a Trump victory in 2016), showed Biden’s lead narrowing to only 3%. Clinton won the popular vote by 2.1% in 2016 it should be recalled.

  • CFTC Commitment of Traders shows aggressive selling of duration. The CFTC Commitment of Traders last Friday showed that traders' short position in bond futures is the biggest ever on record. Ultra and long maturities were the most sold, indicating that the market expects a fast bear steepener. This sentiment can translate in lower participation in this week's 30-year treasury auction on Thursday.

What we are watching next?

  • A busy week in commodities with oil traders keeping an eye on EIA’s monthly Short-Term Energy Outlook on Tuesday followed by OPEC’s World Oil Outlook on Thursday for its take on global supply and demand. Following the biggest quarterly surge in food commodities since 2016, the market will focus on twin insights from the USDA in its monthly WASDE report on Friday and before that on Thursday, United Nations data on global food prices. It is likely to show another jump after hitting a six-month high in August. Copper rallied strongly on Friday as the threat of strike action over wage talks leading to supply disruptions from Chilean mines continues to grow.

  • The US Vice Presidential debate between Mike Pence and Kamala Harris taking on added weight this Wednesday due to Trump’s Covid-19 infection. But this debate was always a bit more interesting than usual due to Biden’s advanced age as the would-be oldest president ever elected, meaning elevated odds that Harris could become president.

  • Delta Air Lines Q3 earnings on Friday will impact the entire global tourism and commercial aviation industry as one of the largest carriers will provide insights on the outlook but also current state of airborne mobility both domestically and abroad.

  • Ant Group IPO one the biggest IPOs in history is still pending with expected offering size at this point of $6.94bn. There is still no announced pricing date, but we expect it to be imminent. The stock will be dual-listed in Shanghai and Hong Kong.

Economic Calendar Highlights for today (times GMT)

  • 0715-0800 – Euro Zone Final Sep. Services PMI
  • 0800 – Switzerland weekly sight deposit data
  • 0830 – UK Sep. Final Services PMI
  • 0900 – Euro Zone Aug. Retail Sales
  • 1400 – US Sep. ISM Services Index
  • 0030 – Australia Aug. Trade Balance
  • 0330 – Australia RBA Cash Target

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