Market Quick Take - May 15, 2020
Chief Economist & CIO
Summary: The US equity sell-off turned tail, and the major indices closed on a strong note, even with fresh signs of the rising risk of US-China tensions after new comments from US President Trump. The US dollar rally likewise fizzled and the most notable move on the day was perhaps the smart rally in precious metals, with silver rallying out of the range and trading this morning at a two-month high.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (Nasdaq 100 Index) – the key pivot low in the S&P500 survived a brief test yesterday, keeping the market in limbo, and the Nasdaq100 made a similar dip-and-recovery as survived a test just below the prior day’s lows and the 21-day moving average (currently 8893). Yesterday’s action underlines that latter level and the actual 8847 low as the focus if the bearish case is to find new sustenance, and likewise, the 2760 low yesterday for the S&P 500, though it is also worth noting that the latter index has not yet taken back the 21-day moving average since breaking below it on Wednesday, though it is trading right on it this morning – near 2850.
- EURUSD and USDCNH – yesterday appeared to show that the US dollar was swinging back into high gear, but the move fizzled and EURUSD didn’t manage to close below 1.0800 or take out the recent range lows below. As we have noted, a major move lower in the EURUSD carries the most weight in most USD baskets and would likely then weigh on the USDCNY (and tradeable USDCNH) exchange rate, with any move above 7.20 there likely triggering widespread unease.
- EURNOK – we noted the recent massive budget announcement as a likely driver for more NOK strength. Yesterday, the EURNOK rallied back to around the key pivot zone of 11.05 that it has just broken below, and NOK has so far survived the test, with the pair trading well below 11.00 this morning. The comeback in NOK from that key support area coincided with the comeback in risk sentiment and oil prices yesterday.
- XLE:arcx (US energy sector) and EXH1:xetr (European oil & gas sector) - with Brent crude breaking above the 6 May highs sentiment be changing for investors wanting exposure in the energy sector. We still prefer selective oil majors but broad exposure through ETFs can also work. The technical picture is obviously weak so this is an early contrarian trade.
- XAGUSD or SILVERJUL20 – Gold's breakout above $1720/oz has added some extra spice to silver with the gold-silver ratio (ticker: XAUXAG) falling to 106.7 (ounces of silver to one ounce of gold), the lowest since mid-March. In the week to May 5 hedge funds held a silver net-long of just 10k lots, down 85% from the February peak. Precious metals in general rising again following renewed weakness in stocks, worries about the global outlook and rising US-China tensions.
- OILUSJUL20 and OILUKJUL20 – Crude oil continues to push higher and in hindsight the collapse to a negative WTI price last month probably saved the market and set in motion the recovery currently seen. Major producers around the world, potentially faced with heightened risk of tank tops and the price collapse spreading, stepped up their efforts to cut production. One month later and demand is slowly coming back while supply has seen a dramatic reduction. However, the rally has resulted in collapsing time spreads which could see oil return from storage over the coming months. On that basis the price could soon hit a plateau as the additional barrels have to compete with producers for customers.
What is going on?
US President Trump aired the idea of shutting down the US relationship with China in an interview And in recent days, China has looked at going after the interests of specific regions of the US represented by members of US Congress who are sponsoring a bill to sanction China for the Covid19 outbreak.
US weekly jobless claims numbers were marred by inaccuracies with the small state of Connecticut reporting 10 times what it should have due to the accidental addition of a digit, while the continuing claims data for California was under-reported – the net result making the initial claims look worse than they should have the continuing claims better. In Georgia, one of the first states to begin opening up from shutdowns, the state reported a 76k drop in continuing claims.
China industrial production rose 3.9% year-on-year in April, even if the year-to-date number was -4.9% due to the shutdowns in Q1. April Retail Sales in China, meanwhile, were down –7.5% year-on-year relative to –15.8% in March.
What we are watching next?
Signals from US and China on status of the trade deal and in general. One of the chief holdouts in taking a more aggressive tone against China has been US President Trump himself, but signals from the last couple of days have begun changing that impression, with comments like those noted in the Reuters article linked to above. China’s National Congress will convene on May 22.
Economic Calendar Highlights (times GMT)
- 0800 – Germany Q1 GDP – not necessarily a market mover, but interesting to watch – expectations are for –2.2% QoQ and –1.6% YoY
- 1230 – US Apr. Retail Sales – somehow Bloomberg only has these as falling –7.6% ex Autos and Gas and –12.0% headline in what will prove the worst month of the crisis. Markets more forward looking.
- 1230 – US May Empire Manufacturing – this is the regional survey for manufacturing in the New York region,the hardest hit in the US, so it will remain terrible
- 1315 – US Apr. Industrial Production – expected –12.0% month-on-month after a –5.4% decline in Mar.
- 1400 – US Preliminary May University of Michigan Sentiment – the market may look at the expectations component here, which is so far only back at 2014 levels while the current conditions component is back at 2011 levels (not directly comparable, obviously)
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