Market Quick Take - July 13, 2020
Chief Economist & CIO
Summary: Last week ended on a positive note despite the ongoing drumbeat of worrisome news on the resurgence of Covid19 cases, particularly in the US. The broader US and other international equity markets joined the high-flying Nasdaq100 with strong showings on Friday, taking the German DAX and S&P500 within striking distance of the post-Covid19 outbreak highs from early June. Equity futures around the world are on a strong footing to start the week ahead of the start of an interesting earnings season.
What is our trading focus?
- US500.I (S&P 500 Index)and USNAS100.I (NASDAQ 100 Index) – It’s a key week for the US equity market in particular, given the start of what should prove a very ugly earnings season, though of course the focus will be on companies’ outlooks. The S&P500 is perched near the post-Covid19 outbreak highs near 3,220, only about a percent higher than the futures were trading this morning before the European session, while the near parabolic “melt-up” in the Nasdaq-100 has continued as the hyper-concentration in the mega-caps reaches historical extremes.
- OILUSAUG20 (WTI) and OILUKSEP20 (Brent)- trade lower ahead of Wednesday’s OPEC+ meeting where the group needs to decide whether to keep the temporary 9.6 million barrels/day production cut into August or begin to restore up towards 2 million barrels/day. Reports over the weekend said the group look set to ease oil cuts as demand continues to recover. The decision however comes at a time where Libya attempts to restore production, U.S. stocks are close to record levels while the pandemic is far from under control, especially across the three biggest fuel consuming U.S. states. Both contracts remain range-bound in our view with resistance at $41 on WTI and $44 on Brent capping the upside.
- COPPERSEP20 (HG Copper) - took aim at $3/lb during the Asian session thereby continuing its impressive run of gains that has taken it to the highest in more than two year and well above January’s pre-pandemic level.On top of the support being provided by virus-related supply disruptions from the world’s two largest producers in South America, the market now also has to deal with the risk of strikes. This after workers at an Antofagasta mine in Chile have rejected a final offer while another operation will conclude voting today on whether to accept a final offer.
- XAUUSD (spot gold) and XAGUSD (spot silver) - General risk on driving stocks higher and the dollar lower combined with surging virus cases and US-China trade and political tensions are the primary sources of inspiration for precious metals this Monday. Adding to this copper’s impressive run of gains which has given silver a fresh boost. The price is once again challenging resistance at $19/oz while the XAUXAG ratio has dropped to 95.50. A break below the June low at 94.50 could be the trigger that signals a move in the spot price towards $20/oz.
- EURUSD – the USD is stuck in a rut and so is the euro – the EURUSD chart lately has looked like a long consolidation period after the solid rally in late May and into June to the 1.1400-area highs. But the general economic outlook needs to improve and risk appetite likely needs to stay high for the EURUSD to confirm the rally and stick a daily close above 1.1400, which could set a new trend higher in motion.
- USDJPY – USDJPY and JPY crosses generally (AUDJPY, CADJPY) could get a bit more interesting to watch in the wake of the earnings season if the market suffers a setback (JPY positive), or if investors decide that the Covid19 impact will quickly pass and the general celebration of easy market liquidity is the focus, regardless, in which case a broad JPY sell-off could resume after sideways action of recent weeks. Key levels for USDJPY are 106.00 (major focus after two post-March melt-down tests of this level) and 108.00-108.50 to the upside.
What is going on?
- Chinese equities posted another strong session overnight to start the week as the CSI 300 Index snapped back from Friday’s weak session and was trading near the recent cycle highs again in the wake of the huge rally last week.
- A U.S. coast-to-coast heat wave could potentially stress crops and support natural gas demand towards cooling. The heatwave may impact developing corn and soybean plants, thereby supporting prices as it may affect yields later in the season. Corn has however started the week falling to a two-week low after the WASDE report on Friday left the yield outlook unchanged.
- The latest Commitments of Traders report covering the week to July 7,saw hedge funds respond to a week of broad commodity gains by raising bullish bets across 24 major commodity futures above one million lots for the first time since late January. While the biggest price gains were seen across the energy sector, led by gasoline and natural gas, it was short covering in the grains sector that helped lift the combined net-long.
- US COVID-19 new daily cases rose to a new record in Florida yesterday but the contrasting conditions are quite evident across the USA, with New York reporting no deaths for a day for the first time since the early phase of the outbreak.
- Netflix () - rocketed some 8% higher on Friday after a bullish Goldman analyst predicted strong subscriber growth in Q2. The company is now worth more than Disney in market cap terms. Netflix is set to report its Q2 earnings on Thursday.
What we are watching next?
- US COVID-19 daily mortality numbers across the Sun Belt states this week and in coming weeks after a rise last week as a key metric for whether of deaths are set to surge in proportion to case count. This is a rough indicator on the risk of severe new lockdowns and whether widened testing is the chief driver of the new case count (presumably capturing many asymptomatic carriers) and/or whether treatment of the disease has vastly improved or even whether the disease itself has mutated and become less deadly.
- Q2 earnings season starts this week with financials in focus. See our Q2 earnings preview from Peter Garny. This week’s top names include JP Morgan (, tomorrow), Delta Airlines (, tomorrow) and Netflix (, Thursday). According to earnings estimates Q2 earnings will be the worst since 2011, but it will also be the most exciting in many years as 80% of S&P 500 companies skipped their guidance in Q1 leaving investors to fly blind into the storm. With US technology stock valuations at record levels there is little margin for error so any revenue miss could lead to steep declines. The record high index weight concentration in S&P 500 by the large technology stocks mean that their results will make or break the equity market over the summer months.
Economic Calendar Highlights (times GMT)
- 08:00 – Switzerland weekly SNB sight deposit data
- 13:00 – UK Bank of England’s Bailey to speak at virtual event
- 15:30 – UK Bank of England’s Bailey to speak on Libor
- 01:30 – Australia Jun. NAB Business Confidence
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