Market Quick Take - July 16, 2020
Chief Economist & CIO
Summary: Wall Street closed yesterday with a slight positive tone, but the mood in Asia soured overnight, led by a hefty sell-off in Chinese equities for the second day with stronger than expected Chinese growth data being off-set by weaker than expected retail sales. After the recent wobble in the incredible run higher by US megacap stocks, the status of the rally faces an interesting test over the next two sessions as Netflix will report after the close today. Copper selling off for a second day as supply worries ease while crude oil struggles to break resistance.
Due to summer holidays, this Quick Take will be the last one until we resume on Monday, July 27.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – yesterday’s session turned in a positive close, with the S&P 500 closing right at the range resistance of 3220 after trading slightly above that level intraday – the next couple of sessions look interesting for the status of the overall rally as this is the key hurdle for the bulls to make a charge at the all-time highs. The Nasdaq-100, meanwhile, is trading in the shadow of the recent sharp consolidation move, with the focus on the 21-day moving average (currently near 10,325) if the sell-off resumes, as this moving average has held, on a daily closing basis, since early April, a remarkable run.
- DAX.I (German DAX Index) - very similarly to the technical situation in the S&P 500 noted above, the German DAX technical focus is on the range highs from June just under 13,000, which the index actually managed to close a hair above yesterday, and yesterday’s intraday high was 12,999, so an obvious focus on that 13,000 level.
- Netflix (NFLX:xnas) - will report earnings today after the close in New York. This has been one of the great “story stocks” for the COVID-19 crisis and its share price rocketed higher on Friday of last week on a bullish earnings call ahead of today’s release from a noted analyst. Since Monday’s high, the stock is down over 9%. This high-flying stock could prove a bellwether for how the market treats the megacap names over this earnings season and looks priced for strong guidance from management.
- Moderna, Inc. (MRNA:xnas) saw a wild session yesterday, gapping more than 15% higher on the open, but closing some 10% off intraday highs. This after the company announced the prior evening that it had successfully passed an early trial for a COVID-19 vaccine and will trial the vaccine with a larger group later this month. Traders should note that Oxford University may have a more promising vaccine under development, one that has provoked both antibodies for the disease and an increase in T-cells, important for the immune system response.
- XAUUSD (Spot Gold) and XAGUSD (Spot Silver) - both trades softer in response to a stronger dollar and weaker stocks. This after risk appetite took a knock overnight with Chinese data showing an uneven path towards recovery. HG Copper’s recent rally, now easing on China data and as supply concerns fade, has reduced silver’s ability to outpace gold. Both precious metals need to consolidate recent gains and could now drift towards $1800 and $19 and potentially even lower. However, the risk of a weak U.S. economic outlook leading to yield-curve control is likely to cushion any short-term weakness.
- NATGASUSAUG20 (Natural Gas) - rose for a third day amid continued forecasts for above-average temperatures across the U.S. leading to a slower stockpile build than normal. Working gas in storage probably only rose by 46 bcf last week according to a survey. If today’s EIA stock report at 14:30 GMT confirms it would be somewhat below the 63 bcf average increase for this week. We maintain our focus on the Oct20-Nov20 spread, currently at -$0.45, given its upside potential should U.S. stockpile growth continue to slow over the coming months, either from rising demand or weaker production.
- EURUSD – yesterday saw the EURUSD rally trying to develop a bit of conviction, with a solid move above 1.1400, but much of the day’s gains were reversed into the close Arguably, the ECB meeting today and especially the EU Council meeting Friday and Saturday are key for whether the Euro can break free and trade higher here, but this 1.1400-1.1450 zone if pivotal for the technical status of the pair from here.
- EURCHF – interesting to note the move above the 200-day moving average (1.0737) here, a possible vote of confidence in the EU outlook and hopes around the recovery package to be discussed Friday and Saturday, so whether this move above 1.0750 holds into early trading next week is an additional key for the broader EUR outlook on top of EURUSD.
- AUDUSD – similar comments to EURUSD above as this pair is likewise key for the overall USD outlook and the Aussie facing headwinds from weak metals prices and an ugly session in Asian equities overnight. The 0.7000-0.7050 region is the key for AUDUSD if it is to trade higher.
What is going on?
- China GDP data was stronger than expected, but marred by a weaker than expected retail sales number, suggesting some caution from Chinese consumers. GDP in Q2 rose some 11.5% QoQ and 3.2% YoY, while Retail Sales in June were still down –1.8% YoY, disappointing expectations for a rebound to slightly positive YoY growth.
- Apple won a court case over €14.3 billion in EU tax payments, a disappointment for the EU Commission’s Margrethe Vestager, who led a charge to have the company pay back taxes to Ireland. Apple shares gapped strongly higher on the open yesterday, but closed with a sub-1% gain as the market awaits the company’s next earnings report at the end of the month. While Apple won this specific case, the EU has recently announced new intentions to crack down on low-tax policy across many EU countries, including Ireland, Netherlands, Belgium and Luxembourg.
- Crude oil trades near resistance after a yesterday’s general risk on but with Chinese data overnight showing that the path to recovery remains bumpy. Not least considering the continued rise in Covid-19 cases around the world. The improved sentiment this week has been driven by signs of progress in developing a vaccine but while the stock market can look across the valley and price in the positive impact of such a development, commodities do not have that luxury. They depend on demand to offset production and any imbalance can – as seen in recent months – trigger major moves. The OPEC+ decision to increase production from August has been called a leap of faith given the not yet under control pandemic.
What we are watching next?
- ECB Meeting today and EU Council meeting tomorrow and Saturday - we are not looking for any surprises in what may prove a “wait and see” meeting for the ECB today, with details on some of the ECB’s existing programmes possibly worth watching, especially how it may have to get around prior self-imposed issue limits allowing it only to buy a certain percentage of any single issue, particularly an issue for German sovereign debt. The ECB is expected to expand its total asset purchase target by some half a trillion euro, but it may wait to see if the recovery package, to be discussed at the more important EU Council meeting tomorrow and Saturday, goes through.
- Q2 earnings season continues. See our Q2 earnings preview from Peter Garny. Today's top name is Netflix (NFLX:xnas), which reports after the close. This release is the highlight of this early portion of the earnings season, given its parabolic rise to new all-time highs after the COVID-19 meltdown. 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.
- COVID-19 news flow – the latest hot spots outside of the USA now include Japan and Australia, with record clusters of cases reported in Tokyo in Japan and in the State of Victoria in Australia.
Economic Calendar Highlights (times GMT)
- 11:45 – ECB Rate Announcement
- 12:30 – ECB President Lagarde press conference
- 12:30 – US Weekly Initial Jobless Claims
- 12:30 – US Jul. Philadelphia Fed Survey
- 12:30 – US Jun. Retail Sales
- 14:00 – US Jul. NAHB Housing Market Index
- 14:30 – EIA's Natural Gas Storage Change
- 15:10 – US Fed’s Williams (FOMC Voter) to Speak
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