Market Quick Take - August 21, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  US equities staged a strong comeback from the weakness inspired by the Wednesday FOMC Minutes release, with the Nasdaq 100 Index vaulting to a new all-time high close even as the broader market was somewhat mixed. In currencies, the USD also weakened again, erasing much of the rally likewise inspired by the FOMC minutes as we look ahead to a key speech from Fed Chair Powell next week.


What is our trading focus?

  • S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – headlines touted the strong comeback in the Nasdaq 100 index yesterday, with yesterday’s price action entirely engulfing the prior day’s range as index went from a three-day low early in Asian hours only to rally strongly and close more than a percent higher and at all-time highs, with the index trading near 11,500 this morning ahead of the European open. We would note some level of concern that the broader market is lagging, with for example, the S&P500 posting a far less enthusiastic comeback and the Russell 2000 posting a negative session and closing at a two-week low.

  • STOXX 50 Index (EU50.I) – European equities are still in a tight range that has now lasted for almost three months as investors are struggling to find a strong narrative. Earnings have been erratic and much worse than US equities, and the lack of major technology companies and overweight of financials in Europe are a major drag on performance. On relative basis we remain negative on European equities vs US equities at least in the short-term.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - continue to consolidate, as they potentially will during the coming weeks while the market gets a clearer post-FOMC minutes view on the direction of yields and the dollar. So far gold has managed to find support ahead of the support area between $1900-$1920 while potential new long buyers may sit on the fence looking for a deeper correction or a break back above $2015 resistance. Silver has, despite the current consolidation focus, held up very well. The XAUXAG ratio, which shows the relative strength between the two metals, is currently trading at 71, not far from the recent low at 69.3.

  • Brent Crude Oil (OILUKOCT20) and WTI Crude Oil (OILUSSEP20) - briefly showed sign of breaking the tight range that has prevailed since June. This after both contracts yesterday suddenly took a one-dollar dive, only to find buyers around at the 21-day moving average, thereby preventing a proper challenge of key technical support levels. The short-term outlook remains challenging with a continued price recovery being tempered by downbeat comments from the U.S. Federal Reserve and OPEC+ on the demand outlook. The overall risk appetite that continues to drive the stock market higher remains the key source of support that is preventing the market from adjusting lower to reflect current oil fundamentals. Brent remains stuck between its 50-day moving average at $43.30 and the 200-day at $46.25.

  • EURUSD the quick snap-back rally in sentiment yesterday after the FOMC minutes cast a brief dark cloud over the markets from late Wednesday, meant that the USD strength eased, and the currency sold off across the board. The action took EURUSD back toward 1.1900 this morning as we await the daily and weekly close today for an indication of whether the wobble in the price action after the pair tried to post new highs for the cycle earlier in the week will result in consolidation back lower or a renewal of the uptrend. We will be watching US futures positioning data with interest as well, as an unprecedented speculative net long position has developed over the last several months.

  • GBPUSD yesterday’s action saw GBPUSD “reversing the reversal” as the Wednesday sell-off that had rejected the rally above 1.3250 was in turn reversed and the pair rallied back to close well above 1.3200 again, as EURGBP also sold off below 0.9000, meaning that the move was driven both by GBP strength and USD weakness. Interesting to witness the sterling resilience despite reports that the current round of Brexit talks, set to wrap up today, have gone nowhere. October is seen as crunch time for getting a deal before the December 31 deadline. For GBPUSD, a return above 1.3200 keeps bullish hopes alive for a follow-on rally to 1.3500.

  • Uber (UBER:xnys) and Lyft (LYFT:xnas) - just hours before both Uber and Lyft were planning to suspend operation in California due to a new law requiring the two companies to classify their drivers as employees a state court granted a delay. Lyft and Uber shares were up 6% and 7% respectively and our view is that momentum could continue in today’s session.

What is going on?

  • US jobless claims rose to 1.1M last week - which was far above expectations of 920k. Continuing claims did drop some 636k to 14.8M. There is fear afoot that the slowing of stimulus aimed at keeping workers on their jobs – especially the end of the Paycheck Protection Program nearly two weeks ago meant to keep employees on their jobs at smaller businesses, could lead to a second round of job losses if the economy is not improving sufficiently quickly this fall.

  • US pharma giant Pfizer (PFE:xnys) will see its COVID-19 vaccine up for regulatory review as soon as October - the company has developed a drug together with BioNTech SE and reports from early-stage study show that the vaccine was well tolerated. Some saw yesterday’s general risk sentiment comeback linked with this announcement.

  • Joe Biden accepts Democratic nomination for president – and in his speech, heavily criticized Trump’s handling of the coronavirus pandemic and promised, among many things, changes including investment in infrastructure and to the tax code that currently “rewards wealth more than it rewards work”. The most recent polls have Biden leading Trump by some 7.5% nationally, with most “poll of polls” at the state level also suggesting that Biden is favoured to win in the electoral college.

  • The staycation syndrome which during the pandemic have seen consumers flock to DIY stores has given a boost to companies such as Home Depot (HD:arcx) and Lowe’s (LOW:arcx), but also supported a surge in Lumber prices. The random length lumber futures (LBc1) contract traded in Chicago jumped to $801.9/1000 board feet yesterday, a 98% rally year-to-date and more than double the 10-year average. Apart from increased demand from stay-at-home consumers, record low interest rates have spurred a jump in new constructions. This at a time where inventories are low due to Trump introduced tariffs on lumber imports from Canada.

What we are watching next?

  • Euro Zone flash Manufacturing and Services PMI for August – these are out this morning for France, Germany and the Euro Zone in general and will be an interesting gauge of the state of the economy across the Euro Zone economy as we have seen a resurgence in virus numbers in recent weeks.

  • A double tropical storm threat hangs over the Gulf of Mexico next week as two potential storms are currently building in the Atlantic with a third system coming off the coast of Africa. The first of the potential three storms have been named Storm Laura and it is on track to become the earliest number 12 storm that have formed in the Atlantic in records going back to 1851.

  • Next week’s Kansas City Fed symposium to see discussion of Fed’s policy review – normally taking place in Jackson Hole, Wyoming, this year’s virtual Kansas City symposium on Aug 27-28 will include Fed Chair Powell discussing the results of the Fed’s policy review, likely to include the already heavily discussed Average Inflation Targeting (AIT) which would allow the Fed to remain slow to respond to rising inflation in order to achieve an average rate over time of 2% after missing that level for years. Powell could also comment further on the Fed’s attitude toward yield-curve-control.

Economic Calendar Highlights for today (times GMT)

  • 0715-0800 – France, Germany and Euro Zone Flash August Manufacturing and Services PMI
  • 0830 – UK Aug. Flash Manufacturing and Services PMI
  • 1230 – Canada Jun. Retail Sales
  • 1345 – US Aug. Flash Markit Manufacturing and Services PMI
  • 1400 – US Jul. Existing Home Sales
  • 1400 – Euro Zone Aug. Consumer Confidence

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