Market Quick Take - October 1, 2020

John Hardy

Head of FX Strategy

Summary:  US equity markets saw choppy trading action yesterday, starting the day significantly down in the wake of the Biden-Trump debate, only then to rally hard and chop back and forth on conflicting headlines on stimulus prospects. The US dollar weakened again, with most EM currencies snapping back higher after a recent bout of weakness.

What is our trading focus?

  • S&P 500 Index (US500.I) & NASDAQ 100 Index (USNAS100.I) – US equities were all over the map yesterday, starting the day generally in a funk in the wake of the vitriolic debate between Biden and Trump before rising strongly on stimulus hopes (more on that below) with gains moderated later in the session as those hopes were partially frustrated and then with equity futures rallying again overnight. The Nasdaq 100 probed the resistance above 11,500 (next level there perhaps the 61.8% retracement of the sell-off from the early September highs, coming in near 11,750). The S&P 500 has not yet traded above the mid-September pivot at 3,420, with the 61.8% retracement of the sell-off from the all-time high in early September coming in just above at 3,432.

  • STOXX 50 Index (EU50.I) – European equities are still struggling to boost sentiment given the uncertainty over Brexit and Covid-19. The Q3 earnings season is crucial for European equities as valuations are rock-bottom relative to Asian and US equities, but investors need a catalyst. The 3,200-3,400 range is still the key range for STOXX 50 to monitor. Any failure to maintain levels above 3,200 this week is clearly weakness and adding to a potential bigger downside move short-term.

  • EURUSD and AUDUSD - the action across USD pairs is extremely tightly correlated in recent sessions, suggesting considerable focus on the greenback direction. The levels to watch if the US dollar continues to sell-off include the 1.1800 area in EURUSD and 0.7200-50 in AUDUSD as a re-attainment of these levels suggests the USD sell-off has generally reversed and the focus will shift to a continuation of the bear trend.

  • EURGBP and GBPUSD – sterling is back on the bid again after a brief consolidation and despite no concrete developments in ongoing Brexit negotiations, were a number of thorny issues remain and where negotiators have yet to enter “the submarine” (paywall) as EU Brexit negotiator Barnier calls it, in which basic endpoint principles have been agreed and the two sides hunker down to iron out the details. Still, EURGBP finds itself back well below 0.9100, and a follow through below 0.9025-0.9000 would begin to suggest a full-scale reversal for the pair. Likewise, the weak US dollar has helped send GBPUSD back toward the pivotal 1.3000 area, a break of which could open for considerable upside.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - both maintain a close eye on the $1903/oz level as they continue to track the latest relief package talks in Washington and the dollar which is currently blowing hot and cold.  Focus on Friday’s job report after Wednesday’s stronger ADP number helped send the bonds lower and dollar higher thereby preventing the break higher, which now looks to be when, not if.  Investment demand through ETF’s remain solid with total holdings just 0.3% below the record 111 million ounces reached on September 21.

  • Soybeans (SOYBEANSNOV2), Corn (CORNDEC20) & Wheat (WHEATDEC20) - all surged higher yesterday after the USDA published lower than expected quarterly stocks for all three crops. Corn and soybeans stock levels witnessed the second-biggest summer drawdowns ever as China stepped up its purchases to feed a rebounding pig herd. Adding to this reduced expectation for this year's harvest and the current bull market just got another leg to walk on. The biggest s/t concern being whether China will pause their buying in response to a stronger dollar and higher prices.

  • WTI Crude Oil (OILUSNOV20) & Brent Crude Oil (OILUKNOV20) - bounced after the surprise drop in U.S. crude oil stocks to the lowest since April. In our latest crude oil update, we described some of the reasons why crude oil is holding up well despite the current headwinds from rising production in Libya to a steadily deteriorating demand outlook. Having bounce ahead of $40/b, Brent crude may once again be looking at resistance at the 50- and 200-day moving averages between $43.20/b and $43.40/b.

  • H&M (HMb:xome) - Q3 earnings beat estimates on better than expected gross margin and online sales up 27%. The European fashion retailer is planning to close 250 stores in 2021 as the it is shifting more sales from physical stores to online.

  • iShares iBoxx High Yield Corporate Bond ETF (HYG:arcx) - Yesterday, Lonestar, a shale driller out of Texas filed for chapter 11. The HYG tumbled slightly, just to recover losses by the end of the day. We believe that the rebound that we have seen in the past couple of weeks in high yield corporates will end amid delays in stimulus decisions and more defaults.

What is going on?

  • US yields rose sharply yesterday – although the move was relatively modest by historic standards, the recent lack of direction in the market makes the move look more significant, with the sell-off possibly inspired by hopes that the US stimulus is on the way – or that Biden will win the presidency and the Democrats will take the Senate – meaning possibly large fiscal deficits that drive the very long end of the curve higher.

  • Roll-Royce plans $6.5bn capital raise - the company has been one of the big casualties of the Covid-19 pandemic as demand for airline engines has collapsed sending Roll-Royce shares down 81% this year. The company is in serious financing situation and the new financing plan is expected to be split between £2bn in capital from an equity rights issues, £1bn from bonds issuance, and £2bn in loans.

  • IPO markets have globally their best year – yesterday two new direct listings, Palantir and Asana, came online in the US with Palantir shares up 31% from the IPO price after having been up as much as 58% on the high. Asana shares had a much more consistent and stronger session ending up 37%.

What we are watching next?

  • US weekly initial jobless claims and continuing claims – are set to be released later today after signs of momentum in the US labor market have been slowing somewhat in recent weeks, particularly with last week’s data print. The ADP private payroll change number for September was +749k, the strongest reading in three months, but continuing claims data showed last week that 12.5 million Americans continue to claim unemployment benefits, still almost double the worst readings in the wake of the global financial crisis.

  • Fate of US stimulus is critical for global markets – yesterday, US Treasury Secretary Mnuchin said that he had offered a package of $1.6 trillion that included some aid for states and he cited “a lot of progress in a lot of areas”. House Democrats have postponed a vote on their latest $2.2 trillion spending proposal to allow another day for negotiations. Global markets, risk sentiment and the US dollar will be highly reactive to stimulus headlines as was the case yesterday.

  • Earnings – PepsiCo reports earnings today, providing colour on the state of the consumer across the company’s many businesses and geographies.

Economic Calendar Highlights for today (times GMT)

  • 0715-0800 – Euro Zone Final Sep. Manufacturing PMI
  • 0730 – Sweden Riksbank Minutes
  • 0900 – Euro Zone Aug. Unemployment Rate
  • 1230 – US Weekly Initial Jobless Claims and Continuing Claims
  • 1230 – US Aug. PCE Inflation
  • 1400 – US Sep. ISM Manufacturing
  • 1430 – US Weekly Natural Gas Storage Change
  • 1545 – ECB Chief Economist Lane to Speak
  • 2100 – New Zealand Sep. ANZ Consumer Confidence
  • 2330 – Japan Aug. Jobless Rate
  • 0130 – Australia Aug. Retail Sales

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