Market Quick Take - May 11, 2020
Chief Economist & CIO
Summary: Markets ended last week on another high note, and the Asian session followed suit to start the week with strong gains. The JPY is the weakest major currency overnight as US long yields snapped back higher on Friday ahead of record US Treasury auctions this week of longer term US treasuries. The US dollar trades near pivotal levels to start the week.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (Nasdaq 100 Index) – the story remains the same here – the ultra-concentration of the market in the mega-cap names (FANG+ and the near periphery) has taken the NASDAQ 100 Index to new highs for the cycle since the crisis-induced sell-off while the S&P 500 trades just below those highs (around 2,965), with the key 200-day moving average looming a bit higher near the 3,000 level. This week looks pivotal for whether US equities can continue to climb the wall of worry. But sentiment remains strong among retail investors and while we struggle to understand the fundamentals we accept the strong technical outlook as long as the 15-day SMA is not broken on NASDAQ 100.
- 10YUSTNOTEJUN20 (US 10Y futures) – US treasury yields have generated few headlines, but this week provides an opportunity as the US Treasury is set to auction record amounts of 3-year (today), 10-year (tomorrow) and 30-year (Wednesday) debt. If auction results are weak, market volatility may rise. If the market refuses to move much, even with relatively weak results, this could be on fears that the Fed plans a comprehensive yield-curve-control programme eventually that would see the pressure absorbed elsewhere – possibly by US dollar weakness if confidence in US treasuries as a safe haven is waning.
- AUDUSD – the US dollar is selling off close to the recent lows versus traditional pro-cyclical commodities like AUD and CAD and AUDUSD is a reasonable G10 FX proxy for risk sentiment as the broader US S&P 500 index faces down key resistance this week, so does AUDUSD, first with the recent pivot top of 0.6570 and then a bit higher, the resistance of the major cycle lows back in late 2019 near 0.6675.
- USDJPY – the yen is weaker as the week gets underway and USDJPY shows signs of reversing. Often, the JPY exchange rate has been more sensitive to long sovereign bond yields. With the US treasury auctions of record size this week for 10-year and 30-year debt, we watch whether the early signs of a USDJPY bullish reversal are confirmed with a rally back toward 108.00 or if JPY bulls can get the rally back on track.
- SILVERJUL20 – While gold remains stuck around $1700/oz, silver has managed to claw back some of its historic discount with the XAUXAG to the downside as well as Silver to the upside looking interesting. Silver has started to enjoy the tailwind from rising industrial metal prices, especially copper (COPPERUSJUL20), which trades higher and currently taking aim at key resistance just below $2.50/lb, an area that provided support for three years before the March collapse to $2/lb. Reports from China that commodity traders are hoarding tangible assets such as metals likely to add some additional momentum in the short term. Hedge funds have cut their net silver long by 85% since the February peak leaving them unprepared for a potentially resumption of strength.
- COFFEENYJUL20 – South American Arabica coffee growers see increased risk of harvest delays and possible losses due to lack of farmhands amid the coronavirus outbreak. Harvesting is the most labor-intense component of coffee production. Colombia and Brazil, which produce 65% of global arabica will need around 1.25 million people, according to growers associations. Against these price positive developments has been a crash in the Brazilian real and signs of weak demand amid the global lockdown.
- DIS:xnys (Disney) – Disneyland is reopening in Shanghai adding some tailwind to Disney’s theme park business and hopes of improving profitability.
What is going on?
New Zealand Apr. Retail Card Spending dropped -46.8% month-on-month but the country has shifted from extreme lockdown to preparing a rapid opening up as the country has claimed success in halting the spread of COVID-19.
COVID-19: South Korea and China are both dealing with localized outbreaks of COVID-19, with South Korea facing an outbreak linked to night clubs and China enforcing a lockdown in a city near the border with North Korea due to a rise in infections. This shows the bumpy nature of reopening economies and South Korean equities also declined in today’s session.
What we are watching next?
Monthly Oil Market reports from the U.S. Energy Information Administration on Tuesday, OPEC on Wednesday and the International Energy Agency on Thursday will be watched closely following a month of carnage in the oil market. With the price beginning to recover the market will be watching closely any changes in the outlook for demand and supply.
US long treasury yields the next few months will see a torrent of US treasury issuance, some 3 trillion in total, as the US must finance its massive fiscal response to the COVID-19 crisis. Much of this will be at the short end of the curve and the Fed will end up purchasing a great deal of this debt in the secondary market anyway, but auction results and long US yields bear watching this week as a sign of the markets confidence in the US treasury market and at least the trust in whether the Fed will move to keep yields near current lows all along the curve. The auctions kick off today with $42 billion of 3-year debt on the block, Tuesday sees a $32B auction of 10-year T-notes, and Wednesday $22B of 30-year T-bonds.
Turkey and USDTRY – the Turkish lira was under major pressure last week after clearly giving up on defending the USDTRY level of 7.00. The fact that in the background, many EM currencies are doing relatively well and risk sentiment is broadly strong has made the TRY’s struggles even more notable. While the USDTRY level has been pushed back lower since last Thursday’s highs, possibly after the Turkish banking regulator banned three major western banks from trading in the country’s currency, the currency bears watching as a possible candidate for triggering more widespread contagion across EM and some of the TRY bounceback is down to the rather negative reason that liquidity is drying up – making even transacting in the currency in any size difficult, with forward prices already marked aggressively lower.
US-China relationship – things have gone very quiet here and some of the general rally in risk sentiment late last week may have been due to news that the US and China are in active dialogue over trade issues, but concerns persist as China could feature prominently in the US presidential election, and there is still the open accusation from the Trump administration on China’s handling of the early phase of the Covid19 outbreak.
World Agricultural Supply and Demand Estimates - The grains market is waiting for the monthly WASDE report from the US Department of Agriculture on Tuesday. Some focus on adjustments for corn demand and exports following the recent slump in demand from ethanol producers (one-third of US demand). Estimates on Chinese demand for US farm goods will also be watched closely as the trade-deal receives new focus from the White House.
Economic Calendar Highlights (times GMT)
- 0730 – Sweden Riksbank Meeting Minutes – RIksbank interesting on the recent pushback from the government on the central bank’s plans to purchase corporate debt and the bank’s ongoing signaling that it will not resume negative rate policy.
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