Market Quick Take - October 19, 2020
Head of FX Strategy
Summary: Sentiment is off to a positive start this week even as China Q3 GDP growth was reported well south of 5%, perhaps choosing instead to focus on strong September numbers from China. Possibly adding to the bounce-back in sentiment is the recurring hope that the US Congress and US President Trump can reach a deal on stimulus after House Speaker Pelosi issued a Tuesday negotiation deadline ultimatum.
What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities are plowing higher in early Monday trading following four sessions of decline after last Monday’s big rally. Next resistance levels in S&P 500 futures and Nasdaq 100 are at 3,500 and 12,000 respectively. This week equities will be impacted by US earnings, fiscal talks in the US and the last US presidential debate before the election November 3. With the VIX Index at 27.4, the options market is still pricing in a lot of volatility in the coming month so be prepared for big trading days.
- AUDUSD – it seems that directional moves are hard to come by after a very dovish RBA Governor Lowe speech last week set in motion an Aussie sell-off as the speech prompted anticipation of the RBA shifting to a full QE programme and possibly even cutting rates at its November 3 meeting. And yet the sell-off has stalled – likely as markets seem unwilling to take a directional view on the market’s center of gravity, the US dollar, ahead of the US election. We continue to watch the 0.7000 area here for a large sell-off, should US politicians fail to come to terms on a stimulus deal ahead of the US election, now just two weeks and a day away.
- EURGBP and GBPUSD - we are looking at high odds of a key Brexit headline this week or next. For this time period – a positive headline is likely to merit a larger reaction than a negative one, as the latter could just mean a further delay of uncertainty rather than anything definitive that immediately points to a hard Brexit risk. For GBPUSD, the upside trigger is a close well above 1.3000 in combination with a bit of USD weakness (generally risk-on backdrop and possibly a breakthrough on US stimulus), while for EURGBP, the breakdown zone is toward 0.9000 for a possible quick move to 0.8800.
- Gold (XAUUSD) and silver (XAGUSD) will be looking for drivers to ignite some fresh life into a stalled rally. Total holdings in bullion backed ETF’s remains stable around a record 111 million ounces while selling in the futures market by managed money accounts continues to create a mixed picture. The net futures long held by this group slumped to 12 million ounces, a 16-month low in the week to October 13, well below the February peak at 28.5 million. Most of the drop was driven by a rise in the naked short, also to levels last seen in mid-2019. For now, the focus remains on the stimulus deadlock in Washington, rising coronavirus cases and the presidential election in two weeks.
- Brent crude oil (OILUKDEC20) and WTI crude oil (OILUSNOV20) will look to OPEC and its allies for direction when the JMMC meet on Monday to discuss the current market situation and strategy. Key focus will be whether the group make any comments about the planned easing of supply curbs from January. With prices stuck in the low $40’s and global coronavirus cases spiking again, the group - despite Russian wishes to increase production - needs to tread carefully. The potential for a U.S. relief package remains alive, but the impact, given rising coronavirus cases, may be limited. Brent is currently stuck in a $41.50/b to $43.50/b range.
- Gilts continue to rally as Brexit deal become more uncertain (GILTLONGDEC20). As last week Boris Johnson’s deadline for Brexit talks was missed, and a deal between the U.K. and the European Union looks more unlikely we see the gilts rising. The recent coronavirus restrictions imposed by the government will most likely add pressure to an already weak economy, strengthening the gilt further.
- Spanish and Portuguese 10-year sovereign yields might fall below zero per cent this week (IS0P:xetr - iShares Spain Government Bonds UCITS). The rally in the periphery will most likely continue as the ECB President Lagarde last week said that the more coronavirus restrictions are going to be imposed, the more financial aid we can expect.
- IBM (IBM:xnys) - IBM reports Q3 earnings tonight after the close. Shares have been flat for six months in sharp contrast to the wider rally in technology stocks. Recently the company announced to spin off its Infrastructure Services unit which has been in decline for over a decade. This will allow the Red Hat acquisition to begin adding more meaningfully to revenue growth and management hopes this could lift valuation metrics of IBM shares.
What is going on?
- The Commitments of Traders report covering the week to October 13 found hedge funds and other large speculators increasing their net long position across 24 major commodity futures by 5% to a fresh 30 month high at 2.1 million lots. The buying was concentrated in Brent crude oil, natural gas, copper, corn and sugar while WTI crude oil, gold, soybeans and cocoa saw the bulk of the selling. From a net short in mid-July, the agriculture sector long now accounts for 50% of the total commodity fund long. More in our weekly update on www.analysis.saxo.
- US Sep. Retail Sales – released Friday – were very strong, with the headline up 1.9% month-on-month and the core “ex Auto and Gas” number up 1.5% versus expectations of +0.8%/+0.5%, respectively. It is worth noting that the US Personal Income gains from the stimulus dropped rapidly after July 31 and will continue to do so after December 31 if a new stimulus package is not agreed.
- China Q3 GDP numbers disappointed, but strong September data brightened mood in Asia. The official Q3 GDP number was out at 4.9% year-on-year vs expectations of around 5.5%, but September Industrial Production was far stronger than expected at 6.9% year-on-year and Sep. Retail Sales were likewise strong at +3.3% year-on-year, by far the highest since the Covid-19 outbreak.
What we are watching next?
- Crunch week for US pre-election stimulus prospects. House Democratic leader Nancy Pelosi has issued a 48-hour ultimatum to get a deal done and said over the weekend that a deal would have to be finalized by tomorrow night or any stimulus bill would have to wait until after the election. She spoke with US Treasury Secretary Mnuchin in a lengthy call at the weekend. Some question whether any larger stimulus bill can get done when many Congressional Republicans are in favour of a smaller deal than President Trump and are beginning to turn on the president as they suspect he could be defeated in a landslide in the election, now just over two weeks away.
- Brexit negotiations need to achieve a breakthrough soon – and despite UK Prime Minister Boris Johnson’s threats last week to pull out of talks if the EU failed to take a new approach, the market has not raised the alarm meaningfully as EURGBP trades at the lower end of the recent range. Boris Johnson is said by sources to be in favour of watering down parts of the “Internal Market Bill” as part of a compromise deal with the EU as the controversial bill threatened to override portions of the original Brexit Withdrawal Agreement - and the Bill might not pass the House of Lords anyway.
- US Q3 earnings season continues and picks up this week: Tesla, Intel, Amazon, American Express, NextEra Energy, P&G, Hermes International, Daimler and Netflix.
Economic Calendar Highlights for today (times GMT)
- 0800 – Switzerland Weekly Sight Deposits
- 1230 – ECB President Lagarde to Speak
- 1400 – US Oct. NAHB Housing Market Index
- 1430 – Canada Bank of Canada Q3 Business Outlook
- 1545 – US Fed’s Clarida (Voter) to Speak on Economic Outlook
- 1900 – US Fed’s Harker (Voter) to Speak
- 2300 – Australia RBA’s Kent to Speak
- 0030 – Australia RBA Oct. Meeting Minutes
- 0130 – China Rate Announcement
- During the day: Virtual OPEC+ JMMC meeting
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