Market Quick Take - June 10, 2020
Chief Economist & CIO
Summary: The FOMC meeting late today is the best opportunity in some time to test whether anything can tame this runaway bull market. Will the latest Fed guidance or hints at policy preferences down the road continue to feed the speculative energy, or is the meeting an excuse for market participants to deleverage, almost no matter the message the market delivers?
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – more signs of divergence yesterday as the big tech names gunned to new highs yesterday and the Nasdaq 100 index cracked 10,000 for the first time while the S&P was a tad weaker on the day (and small caps had a weak session). Having run so far, so fast, this market will be highly sensitive to any message from the FOMC meeting today that isn’t at the dovish end of expectations – which are clearly already dovish. See more below.
- XAUUSD (Spot gold) - has recovered back above $1700/oz ahead of today’s FOMC meeting which the market will be watching closely for any mentioning of yield-curve-control. Something if implemented could trigger the next move higher for gold given the potential for sending real yields lower once inflation begin to recover.
- OILUSJUL20 (WTI Crude Oil) - will once again be watching the weekly crude oil and product inventory report from the EIA at 14:30 GMT. US fuel demand, crude oil stocks and production will be the focus after the American Petroleum Institute last night said that crude oil stocks rose by 8.4 million barrels, contradicting surveys pointing to a 1.8-million-barrel drop. Demand for distillates hits a 21 year low in the previous report, a sign that diesel demand remains weak. WTI has retraced half the price war and demand collapse move with resistance at $40/b and support at $35/b.
- STPU:xmil (US Yield Curve Steepening 2-10) and US Sep 10Year Treasury (Sep. 10-year US T-note futures contract) - trading the yield curve in most cases is trading whether the longer end of the curve moves up or down, now that the front-end of the curve has been trading close to zero (unless the Fed signals that it is readying for a negative interest rate policy, in which case there is room for). If the Fed indicates it is readying a yield-curve control policy in which it will cap longer yields, the curve could flatten somewhat (STPU down) and Sep. T-Note futures could rise. If no indication on yield curve control or yield caps is delivered at this time, the market may sell T-Note futures and STPU could rise instead as the curve further steepens.
- USDJPY and other JPY crosses – the USDJPY move lower continues to stick out as an important indicator of either weak risk appetite, or the expectation that the Fed is set to implement a policy that will keep longer US yields lower and wear on the relative prospects for the USD . By sticking below 108.00, the USDJPY is technically breaking down, with the next level of interest down at 106.00. If the market decides that the Fed’s message today is not what it wanted to hear and the USD rises, the more interesting JPY trades could be in crosses like AUDJPY and NZDJPY as a function of “risk off”.
- AUDUSD – as noted yesterday, the 0.7000 area looks a critical chart point for this risk-sensitive FX pair around this FOMC meeting later today – with the recent high of 0.7040 just a few pips higher than the major highs at the very beginning of the year. Any “buy the fact” reaction for the US dollar to the FOMC tomorrow, or any consolidation in risk assets could read to sharp consolidation lower in AUD – while if the somehow surprises once again on the dovish side, a move and close above 0.7040 could set in motion the next bull move of this pair’s remarkable ascent from sub-0.6000 levels.
- ITX:xmce (Inditex) - reports its first quarterly net income loss on record in Q1 hit hard by store closures and a weak footprint in e-commerce vs competitors such as Zalando. Q1 revenue was €3.3bn down from €5.93bn last year. Revenue in local currencies in May was down 51% y/y and June 2-8 it was down 34% y/y so numbers are bouncing back in tandem with reopening of economies – in the markets that were fully open revenue was only down 16% y/y.
What is going on?
- EU member states are asking Brussels to take into account the risk of a hard post-Brexit transition period. The requests were led by Ireland and Belgium according to an article in FT, countries that would be especially hard hit by any “hard Brexit” with WTO-standard terms of trade. UK Prime Minister Boris Johnson continues to claim that there will be no extension to the Brexit transition period, currently set to end at the end of this year.
What we are watching next?
- FOMC meeting tomorrow and how ready and the Fed is to implement yield-curve control (YCC) - The equity market appears very complacent heading into this meeting and long treasury yields steeply backing down after last week’s run higher suggest that the market is looking to deliver at least hints of a yield curve control (YCC) policy (most likely in the form of not allowing longer yields – whether at 5- or 10-years or longer to not move above a certain level). Any new YCC is more likely something for the September meeting rather than this one, but the guidance is crucial. On the flip-side, the market may not take kindly (and the USD could rally near term) if the FOMC today produces a more relaxed “wait and see” approach and focus on state- and local government and main street lending policies at the expense of longer-term guidance on yield curve control, etc.
- Covid19 – Yesterday, the WHO expressed concern that the virus numbers are headed in the wrong direction, and a number of US states, including Arizona and population-heavyweight Texas are showing a rise in cases. We’re still not fully ahead of this crisis, even as activity in most regions continue to rebound.
Economic Calendar Highlights (times GMT)
- 1000 – Sweden Riksbank’s Ingves to Speak
- 1230 – US May CPI
- 1430 – US Weekly DoE Crude Oil and Product Inventories
- 1800 – US FOMC Rate Decision, Monetary Policy Release
- 1830 – US Federal Reserve Chair Powell to Hold Press Conference
- 2301 – UK May RICS House Price Balance
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