Market Quick Take - September 28, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  US equities managed to close last week on a high note after poking on major support levels and the good mood spilled over into the Asian session today. This week, we look at whether sentiment can improve more broadly as we still note signs of stress in credit and especially emerging markets and for the first US presidential debate on Tuesday to see whether it can shake the polls showing a solid Biden edge.


What is our trading focus?

  • S&P 500 Index (US500.I) & NASDAQ 100 Index (USNAS100.I) – US equities are continuing its rebound from last week gaining 0.7% in early trading. The Nasdaq 100 futures will have to clear the resistance level 11,222, which is the local high from 23 September, in order to move higher. Our view is that the probability is skewed in favour of re-testing the 11,500 level this week but in the medium term we see headwinds for US equities into the election causing a sideways market.

  • STOXX 50 Index (EU50.I) – the rise in Covid-19 cases has been a major roadblock for European equities that are one of the cheapest parts of the global equity market. But the looming uncertainty over Brexit and the second wave of Covid-19 are two risk sources that will continue to be a constraint. Shorter term the STOXX 50 futures need to recapture the 3,200 level in order to escape the downward gravitational pull below 3,100.

  • Spot Gold (XAUUSD) & Spot Silver (XAGUSD) - remain challenged by the risk of further dollar strength and current bond yield developments where a steady nominal yields disguising falling breakevens (inflation expectations) and rising real yields. Total holdings in ETF’s backed by bullion has seen steady but small declines since last Monday’s surge while speculators in the week to September 22 cut bullish bets to near the lowest in 15 months. This in response to the technical outlook which in the short term looks challenged following the break below $1900/oz. Gold is now eyeing support at $1837/oz, the 38.2% retracement of the March to August rally. The U.S. presidential debate, an emerging EM debtorries and the European Banking index trading at a record low all potential sources of support.

  • WTI Crude Oil (OILUSNOV20) & Brent Crude Oil (OILUKNOV20) - trades lower as weakening fundamentals continue to weigh. The Saudi warning to short sellers at the recent OPEC+ meeting helped drive a 15% reduction in speculative short bets in the week to September 3, a week were oil rallied by 3% only to weaken again as the dollar and coronavirus cases strengthened. Focus this week on Libya where production is surging, the dollar, weekly US inventory data and first debate between Trump and Biden. Brent currently trades in a relative tight range with resistance being concentrated around $43.3/b where the 50 and 200-day moving averages meet. Downside support at $41.50/b (100-DMA) followed by $39.50/b.

  • EURUSD & AUDUSD - These are the two primary G10 currency pairs we are watching this week for the status of the USD comeback, which took AUDUSD all the way to the pivotal 0.7000 area, above which the pair has so far found support. For its part, EURUSD declines have been less deep recently and the pair has room to move lower to 1.1500 before the longer-term up-trend comes under fire. To the upside, EURUSD needs to retake perhaps 1.1800 to force the focus back higher.

  • USDJPY - the USDJPY spent all of last week rising from the Monday lows near 104.00 after the prior week’s sell-off that seemed to point to a significant break lower. The rally has fallen short of fully reversing the prior sell-off and the chief interest here is in relative strength as the JPY and USD have both traded significantly stronger against other currencies.

  • HSBC (HSBA:xlon) - shares are higher 7% driven by comments from its largest shareholder Ping An Insurance that it remains confident in its long-term prospects and its ability to restore dividend payout as soon as the pressures from the falling economic activity are easing.

  • China Evergrande (03333:xhkg) - shares are 17% higher today rebounding from a sharp sell-off over the past couple of weeks driven by talks of financing issues. Management issued a rare exchange filing late Friday stating that their real estate operations were healthy, no interest payments had been skipped and that debt has been reduced since March. The fight over confidence was won by management over the weekend, but the situation in Evergrande will continue to be fluid. We expect this company to have an implicit backstop by the Chinese government as real estate company could become a systemic issue due to its $120bn in debt.

What is going on?

  • The New York Times acquired Donald Trump’s tax information over more than 20 years, and these reportedly showed large scale indebtedness and struggling properties and revealed that the president paid some $750 in taxes the year he won the presidency. The timing of the leak of these records would seem motivated to impact President Trump’s re-election chances.

  • The weekly Commitment of Traders report covering the week to September 22 found that speculators somewhat surprising increased their net dollar short against ten IMM currency futures. This during a week where the dollar rallied against most major currencies apart from the JPY. Rising net longs in euro, Swiss franc and the Japanese yen helped boost total short dollar bets by 9% to $34.9 billion.

  • CDX North America High Yield Index will roll into a new series this week. The index will see 11 additions and removals, which could affect overall spreads of the primary indicator of high yield risk in the US. In the meantime, the US primary corporate market is slowing down as we get closer to the US election.

What we are watching next?

  • EM trouble spots after recent wobbles across the board - As the FT notes in an article this morning, many EM countries’ approach to the recovery has been through piling on debt, to the tune of $100 billion in debt as they tapped international markets for funding. The generosity of the global central bank expansion - particularly from the Fed - in response to the Covid-19 crisis. We will watch EM and frontier markets debt and currencies across the board, but will watch TRY and ZAR in particularly this week as two countries with especially fragile fundamentals after the Turkish central bank stopped the TRY’s decline last week with a 200bps rate hike.

  • EM debt crisis goes beyond Zambia - After Zambia called for debt relief and the finance minister suggested that next year’s deficit will be financed by more external borrowing, there is fear that other countries might follow suit. Falling commodities prices, weakening currency and an exodus of capital due to the Covid-19 pandemic is making hard currency debt unsustainable for weaker EM. Angola and Chad might be looking to ask relief from some creditors, and more might come forward.

  • The first Biden-Trump US Presidential debate tomorrow - The polls in this election season have proven far more stable than they were in 2016, perhaps due to the fact that both candidates are known quantities this time around. The debates are perhaps some of the last chances that Trump will have to shake up his re-election odds, if Biden puts in a weak gaffe-filled performance or shows signs of cognitive decline that his critics have touted as an issue.

  • Earnings Micron Technology reports earnings on Tuesday which is important to watch as semiconductors are highly cyclical and a good leading indicator for the rest of the technology sector. PepsiCo reports earnings on Thursday providing colour on the state of the consumer across the company’s many businesses and geographies.

Economic Calendar Highlights for today (times GMT)

  • 0800 – Switzerland Weekly Sight Deposits
  • 1345 – ECB President Lagarde in parliamentary hearing
  • 1400 – UK Bank of England Governor Bailey to Speak
  • 1430 – US Dallas Fed Manufacturing
  • 1800 – US Fed’s Mester (Voter) to Speak

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