Market Quick Take - May 20, 2020
Chief Economist & CIO
Summary: US equity markets probed new highs for the cycle yesterday, but the move was rejected in late trading yesterday, though the action overnight has seen what seems the inevitable bounce. Today sees the release of the latest FOMC meeting minutes, though these are not hotly anticipated. Instead, we are focusing on the key technical resistance levels for equities and support levels for the US dollar.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – a small new high in the Nasdaq-100 for the cycle above 9400 was rejected in late trading yesterday and the S&P 500 has yet to take out that critical 2960-3000 area, as yesterday likewise saw a rejection of a probe to new highs for the cycle intraday. Technically US equities are still strong driven by the V-shape and Fed support narrative. Fundamentally dividend futures on S&P 500 still suggest a lot of pain throughout 2021.
- EURUSD and EURCHF – the EURUSD rally yesterday on the relief from the Merkel-Macron agreement on principle on EU-budget-funded Covid19 recovery package stopped well short of the key 1.1000 area in EURUSD and just above the important 1.0625-1.0650 zone in EURCHF – our two barometers for measuring whether the EUR will continue to find support from the greater signs of solidarity in this move. Germany-Italy 10-year yields spreads were the lowest in over a month at around 210 basis points.
- BNK:xpar (European banks) - continue to be weak and yesterday was a particularly disappointing session among some of Europe’s largest banks. We continue to worry that this sector could suddenly come to live as an additional problem for the EU to handle on top of the ongoing plunge in employment.
- MRNA:xnas (Moderna) - shares were down 10.5% during yesterday’s session weighed down by the large public offering of new shares at $76/shr, criticism of its phase 1 study by leading vaccine experts and general profit-taking behaviour. In extended trading shares were down another 6%.
- AUDUSD – one of our key barometer for the status of the US dollar is this risk-sentiment sensitive pair, where we watch the key cycle resistance around 0.6570 gives was just as we watch the key resistance levels for the S&P500 – the US dollar versus risky currencies is a key global risk benchmark in and of itself.
- USDJPY – USDJPY has backed up toward important resistance into 108.00 and the 200-day moving average currently near 108.30 as long safe-haven yields have risen recently and on robust risk sentiment. This looks a pivotal area and we have an interesting US 20-year Treasury auction later today.
What is going on?
In testimony before a US Senate committee, US Treasury Secretary Mnuchin and Fed Chair Powell offered a different attitude on what is needed for the US economy, with Mnuchin arguing in favour of more aggressive opening up and “wait and see” approach and Powell indicating that more support for the US economy from the government is needed, although he was cautious to avoid too pointed support from obvious Democratic attempts to get an endorsement for their more aggressive approach.
Cboe Equity Put/Call ratio plunges to lowest 1% percentile as option traders are positioning themselves for further momentum and gains in US equities. This might be an ideal time to add long volatility in the portfolio.
The May German ZEW Expectations rose to 51 vs. 30 expected and 28.2 in April (March was –49.5). But do keep in mind – this is a typical “diffusion” survey, meaning that those questioned are merely asked to compare with how expectations are relative to the past month - i.e., yes May expectations are improving, but “current conditions” for this month were the worst for the cycle at –93.5 vs. -91.5 in April, I.e., expectations are expected to improve from an utter stand-still.
What we are watching next?
US FOMC Minutes are set for release late today. We have heard a great deal from Fed Chair Powell recently, so these may contain few surprises.
US 20-year Treasury Auction – today marks the first ever auction of US 20-year treasuries, and after a spot of weakness in US long-date US treasuries in recent days, is worth watching for the implications for the direction in yields and risk appetite. The Japanese yen is particularly sensitive to US yields, tending to rise broadly when long yields fall and vice versa.
Economic Calendar Highlights (times GMT)
- 0730 – Sweden Financial Stability Report – A press conference will follow at 0900 as SEK could react to any pointed comments on policy guidance or bias.
- 1230 – Canada Apr. CPI – too early in the cycle to extract meaning from CPI readings as debates rage over inflationary vs deflationary risks.
- 1330 – UK BoE Members Bailey and others before Parliamentary committee – comments could have implications for sterling – particularly because some politician questions could probe the BoE’ members’ attitude about the currency.
- 1430 – US Weekly DoE Crude Oil and Product Inventories – these are getting increasingly interesting as a measure of both supply and demand as the US economy opens up and after the recent ramp in oil prices.
- 1700 – US 20-year Treasury Auction - a bit more interesting than usual as this is the first auction of 20-year treasuries and after the recent backup in yields.
- 1800 – US FOMC Minutes – no surprises expected here as we have heard a great deal from Fed Chair Powell lately
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