Market Quick Take - July 14, 2020
Chief Economist & CIO
Summary: Yesterday saw a climactic session in the US equity market, with many of the names at the center of the late speculative frenzy seeing enormous trading ranges and closing on a very weak note after posting strong new highs earlier in the session. The weak close was a broad development across equities, and oil and precious metals prices also took a bit of a beating, while the USD put on a mild show of resilience.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – A zany session for US equities yesterday, particularly for some of the most speculative names that have risen in parabolic fashion in recent weeks, as the Nasdaq managed to pull all the way above 11,000 before closing down more than 2% to near 10,600 on the day in the cash session. This created a massive bearish engulfing candlestick for yesterday’s session, a rather sizable hurdle for the bulls now. On a closing basis, we focus on the 21-day moving average for signs that the index is at a risk for a more major correction rather than a mere pullback – that level still someway off today at 10,210. The action in the S&P 500 was less dramatic, but still showed a strong new high rejected and a close at the lows of the day – a bearish reversal until proven otherwise.
- Tesla (TSLA:xnas) - This is a stock with one of the most stretched valuations among large cap stocks and one that has ramped aggressively in recently weeks. Yesterday saw what may prove a climax parabolic high and reversal, as the stock traded nearly to 1800 dollars per share, up some 16% from the prior days close (and more than double the price of the June lows) before closing down 3%. Was yesterday’s session a near term climax for the most speculative names?
- JP Morgan (JPM:xnys) and Delta Airlines (DAL:xnys) - both reporting earnings today – see more below.
- OILUSAUG20 (WTI) and OILUKSEP20 (Brent) - trade lower for a second day on OPEC+ taper jitters and U.S.-China tensions. At Wednesday’s OPEC+ meeting the group needs to decide whether to keep the temporary 9.6 million barrels/day production or begin restoring up towards 2 million barrels/day into a market that’s still far from pre-virus levels in terms of demand. While U.S. stocks are close to record levels, a rising contango in Brent, the global benchmark, is signalling the risk of a potential supply glut starting to resurface. Both contracts remain rangebound in our view with resistance at $41 on WTI and $44 on Brent capping the upside.
- XAUUSD (spot gold) and XAGUSD (spot silver) - have so far failed to break away from $1800/oz and $19/oz, thereby potentially raising the risk of another consolidation/correction phase. The number of recently established longs have exposed both metals to profit taking should the risk off seen yesterday extend into a second day. U.S.-China tensions likely to provide some support while continued speculation about a virus vaccine will do the opposite.
- EURUSD – EURUSD crept higher toward the key 1.1400 level yesterday but the rally reversed slightly on the rather large sell-off in US equities late in yesterday’s session, as the US dollar normally outperforms when risk appetite weakens. A key test from here of the EURUSD-stock market correlation after yesterday’s session and as we are close to that upside trigger level in EURUSD (a close above 1.1400), with the EU moving forward with its recovery package planning and having done a better job than the US in reopening its economy and avoiding the scale of COVID-19 resurgence plaguing the US. To the downside, a close below 1.1250 would suggest a tactical breakdown.
- AUDUSD – this USD pair has gone completely dead in volatility terms and hardly noticed the rather wild gyrations in equity market volatility yesterday and a somewhat chunky reversal in some commodities prices that are nominally AUD supportive and have ramped persistently higher in recent weeks until the session overnight. Difficult to believe that this pair will stay bottled up in its miniscule range of the last several weeks – watching for a break of either 0.7000 if the risk appetite and commodity price rally gets back on the rails, or a move and close below 0.6850-00 opening up possible downside.
What is going on?
- The Trump administration declared China’s claims to the South China Sea are illegal, setting off another escalation in tensions between the two super-powers. Previously, the US was mostly neutral on South China Sea issues, but US Secretary of State Pompeo charged China’s “claims to offshore resources across most of the South China Sea are completely unlawful, as is its campaign of bullying to control them.”
- The EU is set to move against low tax countries in the EU to reduce multi-national companies use of low corporate tax schemes, as low tax levels for large profitable companies has become a political hot button issue over the course of the COVID-19 crisis. The European Commission is looking to pass new measures against these schemes without a unanimous vote to avoid blocking from the smaller countries like Luxembourg and Ireland that benefit the most from these schemes.
- COVID-19 news generally not encouraging, with California moving to stop indoor dining, Australia reporting new hot spots and other regional outbreaks creating headlines.
What we are watching next?
- Risk of COVID-19 linked shutdowns spreading and the 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 (JPM:xnys, today 1045 GMT), Delta Airlines (DAL:xnys, today before market) and Netflix (NFLX:xnas, Thursday) and 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)
- 07:30 – Sweden Jun. CPI
- 09:00 – Germany Jul. ZEW Survey
- 10:00 – US Jun. NFIB Small Business Optimism Survey
- 12:00 – OPEC's Monthly Oil Market Report (Time not confirmed)
- 1230 – US Jun. CPI
- 18:00 – US Fed’s Brainard (FOMC Voter) to Discuss Economy and Monetary Policy
- 18:00 – US Fed’s Bullard (Non voter) to Speak
- 19:30 – US Fed’s Harker (FOMC Voter) to Speak
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