Market Quick Take - August 26, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  Markets remain in a positive mood in the US as the major indices there managed to post new record highs, while European indices stumbled slightly after reaching new local highs. The most notable move yesterday was in long safe haven bonds, which sold off heavily, taking global yields higher and gold lower ahead of a seminal speech by Fed Chair Powell tomorrow discussing new priorities for the Fed after the comprehensive Fed policy review.


What is our trading focus?

  • S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – US equity futures are retreating this morning following three straight strong sessions as very disappointing US consumer confidence figures yesterday are sowing doubt over the recovery. If the market fails to muster support today it will likely test the 3,427 level again which is yesterday’s open price. Some technology stocks were also diverging from the overall market yesterday including Apple which could weigh on US equities today.

  • STOXX 50 Index (EU50.I) – European equities failed to sustain new highs on the day yesterday and the STOXX 50 eased back towards the lows of the session yesterday after an intraday rally, closing relatively unchanged on the day, a distinct disappointment given that the index had just managed to close above the 200-day moving average again on the prior day. Still, the range is tight here and if the mood remains positive, the local focus is on the local 3,377 high, while a close back below 3,300 would suggest we remain in rangebound limbo.

  • Spot Gold (XAUUSD) trades near the lower end of its recent range while Spot Silver (XAGUSD) has lost further ground with the XAUXAG ratio sitting near the recent highs. The market is bracing for possible signals from Fed chairman Powell when he speaks Thursday (see below). A big drop in consumer confidence to a cycle low has been offset by rising bond yields and the dollar edging higher. Continued focus on and hopes for a coronavirus treatment also weighing on the market. Key support remains ahead of $1900 for gold and $26 for silver.

  • WTI Crude Oil (OILUSOCT20) & Brent Crude Oil (OILUKOCT20) - both maintain a muted bid ahead of Hurricane Laura making landfall on Thursday. The final trajectory (see below) will determine the impact on key U.S. refinery installations around the Houston area. RBOB Gasoline (GASOLINEUSSEP20), which has rallied in response to 3 million b/d of shut in production trades lower after touching $140 overnight. Ample gasoline supplies and motor fuel consumption down 10% from a year ago should limit the impact of a temporary disruption. Later today, the EIA publishes its weekly stock report. Surveys and result from the American Petroleum Institute point to stock draws in both crude and gasoline. WTI crude finally broke above $43/b, but the lack of follow-through raising concerns about a correction once the hurricane has passed. Brent meanwhile is challenging its 200-day moving average at $46/b.

  • EURUSD traders seem to be holding their collective breath, waiting for the next move here after EURUSD is trading sideways and clearly in search of a catalyst – the key technical triggers look to be a close above 1.1900 or below 1.1700 to establish direction as we await an important Powell speech Thursday (see below). Tactical traders should note that the winding price action has seen 1.1754 and 1.1850 established as local lows and highs.

  • USDRUB the ruble is under pressure as widespread protests continue in Belarus that may affect the fate of the generally pro-Moscow leader Lukashenko there. As well, the USDRUB exchange rate has slipped to a new multi-months highs yesterday as Russia's leadership finds itself in hot water over accusations that the Russian opposition leader Navalny was poisoned and now lies in a coma in Germany undergoing medical treatment. (and possible linkage of the two stories is). Germany’s diplomatic response to the situation could be the next key for whether the ruble is shoved considerably lower as Germany and the EU have to balance the viability of criticism or sanctions versus especially German reliance on Russian natural gas.

  • Alibaba (BABA:xnys) - Ant Group (formerly Ant Financial) has filed for IPO with the stock exchanges in Shanghai and Hong Kong targeting a valuation about $225bn with rumours suggesting an offering size of $30bn beating the IPO record of $29bn by Aramco. Alibaba is Ant Group’s largest shareholder controlling 33% and thus stands to gain from the huge IPO which could increase in size in the lead up to the actual pricing as investor sentiment in China is red hot for technology stocks.

  • Apple (AAPL:xnas) - shares were under pressure yesterday as the first court ruling in the case against Epic Games gave neither party a victory but did order Apple to continue to allow Epic Games access to provide the Unreal Engine for other apps. Apple had a small victory in that the court allowed Apple to continue blocking Fortnite from on its App Store. This court case could become existential for Apple’s valuation as the Services segment is the key driver of future profitability.

  • Salesforce (CRM:xnys) - shares were up almost 4% in the primary session on the news that the stock is included in the famous Dow Jones Industrial Average. The shares extended the gains in the after-market increasing 8% on strong Q2 earnings with revenue at $5.15bn vs est. $4.90 and their revenue forecast for the current fiscal year is $20.7-20.8bn around 4% above estimates.

What is going on?

  • Yields rose sharply yesterday, especially at the longer end of the safe haven yield curves. The US 10-year benchmark rose to above 0.70% overnight, taking it back close to the two-month highs from earlier this month and ahead of a key speech by Fed Chair Powell likely outlining plans to allow inflation to run higher as long as unemployment is likewise high. The move higher in yields was mimicked in Europe and elsewhere as well and at some point could begin to impact risky assets that have in part been bid higher on the argument that low yields support far higher earnings multiples, especially for companies showing steady growth. Higher yields also tend to act as a headwind against the gold price.

  • American Airlines to fire 19,000 employees – not only is this a story showing the second wave risks of the pandemic as activity for key sectors like travel is far from resetting to the levels before the pandemic, but could ignite a firestorm of criticism over the company’s management, which enriched itself with enormous stock compensation while leveraging up the company in recent years and receive a massive aid package from the US government due to COVID.

  • US Consumer Confidence registered a new post-COVID-19 outbreak low in August, a huge surprise relative to expectations as the overall reading was 84.8 vs. 93.0 expected and 92.6 prior, with the Present Situation shortfall particularly surprising at 84.2 vs. 95.9 previously. This raises “second wave of weakness” concerns and confidence readings are most highly correlated with that state of the labor market.

What we are watching next?

  • Hurricane Laura spinning in the Gulf of Mexico with potentially devastating impact – the storm is forecast to make landfall as a major hurricane (possibly Category 3 or higher), with the precise point of impact of critical importance due to the presence of massive refining, shipping and population centers in the region. A few tens of miles one way versus the other is the difference between a major disruption of refineries and the loss of property and even life in the Houston and Beaumont-Port Arthur area and a very light impact (if the storm hits farther east along the Texas-Louisiana border.

  • US Republican National Convention and US presidential election poll developments in coming days/weeks – the convention wraps up tomorrow and one point worth mentioning in the state of polling on a state by state basis as we head toward the final sprint into the election, is that Biden is actually slightly behind where Clinton was at this point in the 2016 election cycle on average in a key group of states that decided the election in Trump’s favour. Of the states Florida, Pennsylvania, Wisconsin, Michigan, Arizona and North Carolina, Trump is only doing worse in the polling relative to 2016 in Florida.

  • This 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)

  • 1230 – US Jul. Preliminary Durable Goods Orders
  • 1400 – Canada Bank of Canada Mandate Workshop with Deputy Governor Wilkins to Speak
  • 1430 – US Weekly DoE Crude Oil and Product Inventories
  • 1600 – US Bank of England’s Haldane to Speak

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