Market Quick Take - October 20, 2020

Macro 6 minutes to read

John Hardy

Head of FX Strategy

Summary:  Sentiment dipped again yesterday after an attempt at a positive start, with US equities closing near the lows of the day and at their lowest level in more than a week. Stimulus talks between House Speaker Pelosi and Treasury Secretary Mnuchin are said to be ongoing after Pelosi declared a negotiation deadline for today.


What is our trading focus?

  • Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities nosedived yesterday despite strong start to the week with the Nasdaq 100 leading the decline as the market is getting increasingly nervous that the US economy could face a fiscal stimulus gap if the fiscal deal before the election fails. The 11,600 level in Nasdaq 100 proved to be the support level for now so obviously important level to watch if weakness extend today should we get negative news out on the fiscal deal.

  • AUDUSD – the AUD was already trading on the weak side on recent RBA Governor Lowe comments seen likely to mean a QE programme will be announced at the November 3 RBA meeting, but AUD took a further tumble overnight as another RBA official, Christopher Kent, was out overnight in an interview suggesting there was further room to “compress” the short-term rate, and that it wouldn’t be surprising to see short rates below zero at some point.

  • EURGBP and GBPUSD a bit more nervousness creeping into the sterling crosses yesterday as the UK side in Brexit negotiations has declared itself unwilling to restart talks until the EU makes concessions. The longer a stand-off continues, the more risk of tactical sterling downside. This followed the supposedly sterling-positive news that British officials are likely to dilute measures in the “Internal Market Bill” that would override portions of the Brexit withdrawal agreement. Some see this as a negotiation tactic raising the odds of a deal with the EU, others as a more practical recognition that the House of Lords was set to strike down portions of the bill anyway.

  • Gold (XAUUSD) and silver (XAGUSD) will be looking for drivers to ignite some fresh life into a stalled rally. Total holdings in bullion backed ETF’s remains stable around a record 111 million ounces while selling in the futures market by managed money accounts continues to create a mixed picture. Despite a softer dollar gold trades lower with the prospect for more U.S. stimulus remaining elusive ahead of the Democratic-set deadline later today. In gold, channel support can be found at $1894/oz while selling continues to emerge above $1910/oz.

  • Brent crude oil (OILUKDEC20) and WTI crude oil (OILUSNOV20) remain stuck in the low $40’s with OPEC+ warning of a muddy outlook as the resurgent coronavirus hits consumption around the world. With rising Libyan production adding to the uncertainty, an agreed 1.9 million barrel/day production increase from January remains in doubt. Focus on U.S. stimulus talks and tonight's weekly stock report from the American Petroleum Institiute. Brent is currently stuck in a $41.50/b to $43.50/b range.

  • The Bloomberg Grains Index (tracked by ex. AIGG:xlon) has reached a 15-month high after rallying 10% so far this month. During the past week the rally has been given fresh life by wheat’s surge to near the highest since December 2014 on dry weather concerns in the U.S. Plains and the Black Sea region. The roll yield from holding a basket of grains and soybean has turned positive for the first time since 2014. At 3.4% on a 12-month roll basis it is now well above the annual average cost of 5% to 10% seen during the past five years, another potential source of support from financial investors re-entering the market.

  • Italian sovereigns (10YBTPDEC20) are dumped by investors as the government imposes further restrictions due to record high cases of coronavirus. The Italian yield curve steepened, with the yield of 10-year and longer maturities rising more than 7bps. A downgrade from S&P might be imminent, it is the last credit agency to rate Italy two notches above junk. As the ECB prepares for more stimulus, we most likely see the Italian yield curve flattening by year end.

  • IBM (IBM:xnys) - Q3 revenue and earnings were in line with preliminary figures from two weeks ago, but the cloud business segment surprised against estimates highlighting that this business is doing better than expected, something investors have still not recognized. With the future spin-off of its infrastructure services segment (around $20bn in revenue) the growth profile of IBM could change, turning into a long-term positive catalyst for the shares.

  • NFLX (NFLX:xnas) - the world’s largest video streaming service reports Q3 earnings tonight after the US close. Global downloads of its mobile app in Q3 have been the weakest q/q in many years suggesting the potential for a negative surprise. In addition, no major content releases have been pushed in Q3 (compared to a strong content line-up in Q3 2019 making y/y numbers tough to beat) and competition is heating up across the video streaming industry with Disney+ accelerating its subscriber growth.

What is going on?

  • The US NAHB Housing Market Index set a new all-time high at 85 vs 83 expected. Since the Covid-19 induced rate cuts and support for record low interest rates via the Fed’s MBS purchases, the US housing market is on fire, a sign of the “K-shaped” recovery dynamics in which those with good credit are able to bid up housing prices aggressively - and in the end pricing the unemployed, lower paid workers and Millennial generation even further out of the market.

  • Demand for green bonds continues to grow but offer remains limited. Canadian Imperial Bank of Commerce yesterday issued $500 million 5-year green bonds at 63 basis points over Treasuries, which is 22 basis points tighter than initial price guidance. This is one of greatest appreciation we have seen in the green bond market, as offer is still not able to satisfy demand.

  • US air passengers exceed 1mn on Sunday for the first time since March. US Airlines was out saying that it believed the worst was over on travel in the US pushing its shares up 3.5%. The uptick in air passengers shows that people want to go back to their previous habits despite Covid-19. This could lead to the conclusion that investors should buy airliners, but the Covid-19 impact has significantly bloated their debt on the balance sheet which will compress earnings for years despite a rebound back to pre-Covid-19 activity.

What we are watching next?

  • US stimulus package getting closer? House Democratic leader Nancy Pelosi and US Treasury Secretary Mnuchin are said to be getting closer to agreement on new relief/stimulus package, with Pelosi having established today as a deadline for agreement if a package is to get done before Election Day on November 3. It is still not clear whether the Trump administration represents a position that matches what Republican senators are willing to approve.

  • US FDA meeting on vaccine candidates set for this Thursday – with some of the reports that will be discussed around vaccine candidates to be released already today. It is unlikely any individual vaccine will achieve emergency approval now, but this meeting could give a sense of how promising some of the candidates in late stage testing may be and how close the FDA is to being able to make a decision.

  • US Q3 earnings season continues and picks up this week:  Tesla, Intel, American Express, NextEra Energy, P&G (today), Hermes International, Daimler and Netflix (today).

Economic Calendar Highlights for today (times GMT)

  • 1200 – Hungary Central Bank Rate Decision
  • 1230 – Canada Sep. Teranet/Home Price index
  • 1230 – US Sep. Housing Starts and Building Permits
  • 1900 – US Fed’s Brainard (Voter) to speak
  • 2030 – API's Weekly Oil and Product stock report

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