Market Quick Take - August 14, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  Yesterday featured one of the quietest equity sessions in recent memory, although bond markets are beginning to send a rather loud signal, as US yields continue to rise all along the curve, particularly at the long end, steepening the US yield curve. A much larger than expected drop in US weekly jobless claims boosted sentiment on the US outlook. Gold and silver managed to extend gains despite higher yields.


What is our trading focus?

  • S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – one of the more quiet sessions in recent memory that generated few headlines, or technical comments of note, as the Nasdaq pulled back slightly into the close after nudging the cycle- and all-time highs just above 11,270. The S&P 500 saw a rare sub-1% trading range day and remains perched just below the all-time highs (approximately 3,387).

  • STOXX 50 Index (EU50.I) - very little action in early trading this morning after a directionless session in Asia. There are no real macro catalysts today, so the potential driver today is any action in US Treasuries that have been main driver of markets in the past couple of sessions. European equities are still lagging a strong narrative that can create momentum. EURUSD is climbing higher again which will short-term act as headwind but longer term it is a signal that foreign investors are warming up to European equities that are much cheaper than US equities. Next important level for STOXX 50 is 3,400.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - both continue to recover from their Monday sell-off as treasuries stabilize and the dollar shows renewed signs of weakness. Gold is still on track to record the first weekly decline in ten weeks despite recouping half of what it lost since the August 10 peak. It is currently stabilizing around $1950/oz while silver, which saw a 20% slump since Friday, has recovered even stronger with the XAUXAG ratio returning to the low 70’s after briefly hitting 80 on Monday. A period of consolidation is what both markets need with continued focus on yields, the dollar as well as pandemic and geopolitical developments. 

  • Brent Crude Oil (OILUKOCT20) and WTI Crude Oil (OILUSSEP20) - remain stuck in a tightening range with the caution being expressed in key oil market reports this past week being offset by signs an energy demand recovery in the U.S. is gaining traction. On the other hand, declining refinery margins due to bulging stocks of diesel and gasoline could trigger rising crude oil stockpiles into September. During the past three days, WTI crude oil have touched, but not yet closed above its 200-day MA, today at $42.70/b while the 50-day MA provides support at $40/b.

  • EURNOK EURNOK is having a look at the sub 10.50 area cycle support, having now slipped back below the 200-day moving average after a couple of interactions with this key moving average in recent months. The Norwegian krone has been one of the strongest DM currencies over the last several weeks. Any growing sense that the outlook is turning hopeful and/or a break higher in crude oil after a very compressed range in the Brent futures of late could help accelerate the EURNOK move toward the next objective, the 10.00 area that was the pre-COVID-19 outbreak resistance.

  • EURUSD - EURUSD is one of the key indicators here for an overall direction on the US dollar as the pair rebounded above 1.1800 yesterday, although the move did not stick particularly well. The tactical focus for traders is whether the pair can stick a close above 1.1900 to gather momentum for an attack on 1.2000 and beyond, while bears and disappointed bulls could drive a deeper correction if the recently important 1.1700 area fails. The speculative positioning in and higher still in today’s trade. The high close for the cycle is 1.1877, with 1.1900 a clear chart resistance point after three recent probes of that level that weren’t sustained. A weak USD would help the reflation/strong risk appetite narrative and vice-versa.

  • TKA:xetr (ThyssenKrupp) - shares were down 16% as the German industrial company said that losses would continue in Q3. ThyssenKrupp has been a turnaround case for years and COVID-19 obstructed a planned divestment of its elevator business worth €17.2bn. Since then the value has fallen due the economic slowdown and the company’s steel business is suffering hard. In the last 12 months the company lost $2.1bn in free cash flow and has had a history of notorious volatile cash flows. Bloomberg’s default risk model has jumped to 5% over a 1-year horizon which is twice the level during the financial crisis.

  • IQ:xnas (iQIYI) - shares were down 12% in extended trading as the Chinese video streaming service reported weak Q3 outlook expecting potentially negative revenue growth q/q and reported that the SEC is investigating potential accounting irregularities highlighted recently by short seller Wolfpack Research.

What is going on?

  • US weekly initial jobless claims and continuing claims drop - at 963k, the US registered the lowest new jobless claims number since the crisis struck, far better than the 1.1M expected and 1.19M last week. The continuing claims number dropped even more sharply by over 600k to 15.5M.

  • US yields rose after weak 30-year T-bond auction – the US 30-year yield rose sharply yesterday in the wake of the auction of $26 billion of 30-year T-bonds, as demand was the lowest at the auction since July of last year, with a bid-to-cover of 2.14.

  • Apple shares rise to new all-time high on new ‘Apple One’ subscription bundling which is rumoured to be announced in October with the announcement of the new iPhone. Subscription bundling is Apple’s next move to strengthen its ‘Services’ eco-system as a single subscription would give access to storage, music, movies, gaming, new fitness app universe etc. The news did not shine in isolation as Epic Games, the gaming producer behind Fortnite, was removed from the App Store due to violating the guidelines according to Apple. Epic Games is calling Apple and Google a duopoly and calls their 30% cut excessive adding ammunition to the anti-trust case against these technology companies.

What we are watching next?

  • Government bond yields – safe-haven bond yields rose sharply again yesterday and this development, at some unknown point, represents a challenge of the narrative on what is driving equity valuations, for example, higher. The US 10-year yield has risen some 20 basis points from the low near 0.50%, and round yields levels are often a focus – the next being 0.75% ahead of 1.00%. The post-COVID-19 high from early June was 0.95%.

  • US July Retail Sales - hard to believe, but US Retail Sales actually rose back to within one percent of all-time highs in June as lower income households spent their stimulus checks and extra benefits. The July Retail Sales are expected to show another strong growth of 2.1% for headline month-on-month sales and +1.0% at the core. Interesting to see, however, if there is any disappointment in this number on increasing caution in anticipation of the expiry of the $600/week federal unemployment benefit at the end of the month – a check that has now been reduced to $300 or $400, depending on the state.

  • OPEC+ monitoring committee will meet next week to assess the state of the market. Once again comments from Russia and Saudi Arabia will be watched closely, especially with regards to those members still struggling to deliver the promised production cuts.

Economic Calendar Highlights for today (times GMT)

  • 0800 – Poland Q2 GDP
  • 0900 – Euro Zone Q2 GDP
  • 1230 – US Jul. Retail Sales
  • 1300 – Canada Jul. Existing Home Sales
  • 1315 – US Jul. Industrial Production
  • 1400 – US Aug. Preliminary University of Michigan Sentiment

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