Market Quick Take - June 4, 2020

Macro 3 minutes to read

Steen Jakobsen

Chief Economist & CIO

Summary:  Stocks trade softer after the Nasdaq 100 briefly broke the February closing record while bank gains led the S&P 500 Index to a fresh three-month high yesterday. Bond yields and the dollar both rose after U.S. private payrolls showed fewer job losses than expected. In Germany Chancellor Merkel's government sealed a EUR 130 billion stimulus package while the ECB later today is expected to announce a boost to its rescue program. Crude oil trades lower as a US fuel glut highlights weak demand while an agreed OPEC Plus production cut extension hit a roadblock with emerging unease about compliance. Gold once again managed to find support below USD 1700/oz following the biggest slump in a month.


What is our trading focus?

  • US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – U.S. equity futures trade softer overnight with momentum seems to have stalled in today’s Asia trade, unsurprising given recent bullish price action is technically stretched, however recent strength leaves us sceptical on follow through of any bearish price action.

  • OILUSJUL20 (WTI crude) and OILUKAUG20 (Brent crude) - Brent crude oil’s return to a 40-dollar handle has so far proven to be short-lived. During the past week the oil market has moved higher in the belief that the OPEC Plus group of producers at their virtual meeting Thursday would extent a deal to curb production. Once again however the problem regarding cheating has emerged. With Russia, for a change, being close to full compliance the group has become much more reluctant to accept cheating from others. OPEC+ however, cannot afford not to reach an agreement with the current market price nowhere near the level many of the producers need to balance their budgets. On that basis we expect a deal of some sort will be reached, but the lack of compliance will leave the deal short in delivering its full price supportive potential.

  • XAUUSD (Spot gold) - managed to recover back above $1700/oz following the biggest slump in a month. The continued rise in global stocks, as the markets continue to price in a V-shape recovery, has reduced demand while triggering some profit taking. Gold futures specifically are suffering from an exodus of investors and traders into ETFs. Open interest in COMEX gold futures and the net-long held by speculators have both dropped to a one-year low while total holdings in bullion-backed ETFs continue to set new records. Demand for gold is still there but the choice of instrument has changed following the transatlantic disconnect that occurred in March between spot gold traded in London and futures traded in N.Y. We maintain a bullish outlook for gold, but investors need to be patient with the short-term risks of a deeper correction than the $1690/oz seen yesterday.

  • ADS:xetr (Adidas) - the new German stimulus package worth €130bn agreed to by coalition parties tonight includes a VAT reduction from 19% to 16% starting on 1 July. This will be a net positive for consumer sentiment and consumption. Reducing VAT has been part of the talks leading up to the negotiations and Adidas shares have also responded rising 32% from May lows closing above €250 yesterday the highest closing price since 4 March. Adidas also announced this morning that sales in China in May was above last year’s numbers fueling up of a quick recovery. The US-China tensions could become a tailwind for Adidas among Chinese consumers.

  • USDJPY – trades up 1.2% this week, thereby bucking the recent trend of overall dollar weakness. From a technical perspective the 110 is the next natural key resistance level. This is likely a function of U.S. yields having moved higher 0.75%, thereby challenging the top end of the recent range. The 10-year Note futures (ZNU0) is currently challenging 138-00 support leading to some speculation that we could be breaking lower. Rising yields would re-invite discussion and focus on yield-curve control and what level yields need to reach before the Federal Reserve steps in.

What is going on?

  • Unrest in the US continued as protesters defied curfews putting more pressure on President Trump as the US election is getting closer. The protests have increased his disapproval rating to about the worst levels for his first term as president. Yesterday, the US defence secretary openly said he disagreed with Trump using the military to stop the unrest echoing a growing number of retired military officials.

  • German coalition agrees to €130bn stimulus package which includes reduction of VAT and extra benefits for families with children. Adding all the German stimulus packages together since early March the German government has now agreed to aggregate stimulus of more than 30% of GDP exceeding all other EU countries in size. The market will likely celebrate in the short-term but there is both a bill to be paid in the future and it sends a strong signal that Germany is in a deep economic crisis.

What we are watching next?

  • Nonfarm Payrolls and Non-manf ISM for May this week are critical US macroeconomic data points that are out tomorrow and will give the first indications of the severity of the job market loss and potential rebound trajectory.

  • Expectations are rising for ECB to expand its bond-buying programmes at its meeting today to add stimulus while the political impasse in Europe continues to put the recovery at risk. The current €750bn ECB bond-buying programme PEPP (Pandemic Emergency Purchase Programme) will run out of bonds to buy by October in which the recovery will still be in a fragile recovery.

  • Yield-curve control (YCC), was discussed at the April FOMC meeting and it could be implemented over the coming months. In doing so the Federal Reserve could choose a rate, such as the 10-year Treasury yield, and committing to purchase as many securities as necessary to keep the rate under a set level. If implemented, gold could benefit as real yields would move further into negative territory once inflation picks up.

Economic Calendar Highlights (times GMT)

  • 11:45 – ECB Rate Decision
  • 12:30 – ECB's Lagarde speaks
  • 12:30 – US Initial Jobless and Continuing Claims
  • 14:30 – EIA's Natural Gas Storage Change

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

AppleSportifySoundcloudStitcher

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.