Market Quick Take - August 19, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  Yesterday's equity session saw the major US indices closing at all-time highs, and yet a curious episode of volatility in the New York morning yesterday, possibly linked to a sudden steep drop in gold, marred an otherwise strong session. The USD dropped to a new low, derailing the rally attempt in European stocks yesterday. Gold trades back below $2000 after struggling to recover from yesterday's sudden high-volume sell-off.


What is our trading focus?

  • S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – the S&P 500 cash index finished yesterday at an all-time closing high and US equity futures are continuing higher this morning. Despite a bit of volatility in early US session coinciding with volatility in gold and the USD, bids were strong enough to reverse course underscoring the strength of equities. Strong rebound in US housing data also helped on sentiment.

  • STOXX 50 Index (EU50.I) – the stronger EUR continue to constrain upside moves in European equities that have now traded sideways since mid-June. The 50-day moving average has proven to be support level over the past two weeks, so the 3,270 level is key to watch for downside moves and especially if the narrative of rising COVID-19 cases in Europe takes hold. As long as the EUR is strongly bid, we see limited upside in the short term.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - trade below $2000 and $28 ahead of the release of FOMC minutes later today. Both took a sudden an unexplained heavy volume tumble yesterday afternoon from where they have since struggled to recover. Perhaps triggered by the dollar recovering some of its earlier losses while the S&P 500 broke above its February high. The war of words between China and the US continue with China denouncing the US latest move on Huawei while Trump said he called of last weekend's trade talks while blaming Beijing's handling of the coronavirus. In our latest commodity webinar we focused on the developments that has driven gold and silver to these elevated levels while also highlighting the reasons we maintain a bullish outlook. Gold has now established resistance at $2015 with the first line of defense at $1975 followed by $1957.

  • Brent Crude Oil (OILUKOCT20) and WTI Crude Oil (OILUSSEP20) - once again failed to receive a bid from the general risk appetite being signalled through a weaker dollar and a new high in the S&P 500. Instead both contracts are stuck in very tight one-dollar ranges with the focus on today’s OPEC+ committee meeting. The JMMC will analyse and discuss the latest oil market developments but no major announcements are expected. Also, today the weekly Petroleum Status Report from the EIA which may focus on gasoline. This after the American Petroleum Institute last night said gasoline stocks rose by an uncomfortable large and counter seasonal 5 million barrels last week. Six days in a row WTI has now been rejected at $43 while support continues to move closer.

  • USDJPY the pair initially found support on its run lower yesterday precisely at the 61.8% Fibonacci retracement of the recent rally at 105.28, but the selling gathered pace again overnight before support was found just ahead of 105.00 (at 105.10). The 105-104.50 zone has supported the pair on multiple occasions stretching back more than two years. The most likely source of new support for the USD would be a rise in long yields, which has not materialized, with the US 10-year Treasury yield benchmark settling yesterday two basis points lower and trading this morning near 65 bps.

  • GBPUSD as post-Brexit transition period talks resumed yesterday between the EU and UK, sterling rallied to new highs against the US dollar, well clear of 1.3200, a new high for 2020. The move needs to hold above perhaps 1.3150 to maintain viability and we watch for headlines indicating the mood in negotiations, as some fear that the EU will continue to take a tough stance to force the UK to back down from some of its terms. (More below.)

  • Maersk (MAERSKb:xcse) – the world’s largest container shipping company is forecasting FY EBITDA of $6-7bn against consensus estimate of $5.83bn, and Q2 revenue was a bit better than the market had expected. The company still expects global container volume to contract in 2020 but Q3 volumes are seen improving q/q. The better than expected guidance could lift the shares above 10,000 and matching the recent highs from December 2019.

  • Walmart (WMT:xnys) - reported Q2 adj. EPS of $1.56 vs est. $1.24 driven by strong e-commerce performance seeing revenue up 97% y/y. US comparable revenue excluding fuel was up 9.3% vs est. 6.2%. The retailer says that COVID-19 has caused an increase in costs of $1.5bn mostly related to employee bonusses. Resurgence in US COVID-19 cases has also stalled back-to-school sales which is running lower than normal. The most interesting information that came out of the conference call with management was that comparable sales was under pressure in July as stimulus checks were running out indicating that the economy and retail sales are dependent on government stimulus.

What is going on?

  • Former Vice President Joe Biden was formally nominated as Democratic candidate for US President at the Democratic National Convention last night. Some 28% fewer videos tuned in to television watch the convention relative to the 2016, but with dramatic changes in scale of on-line viewing.

  • European countries move against COVID-19 resurgence - yesterday, German Chancellor Merkel said that no further easing of restrictions will be possible until the latest resurgence is reversed, France will require mask wearing in most indoor work areas, including open-plan offices, and Netherlands is encouraging work from home and limiting private gatherings to only six.

  • US Housing Starts and Building Permits surged in July – with the pace of activity effectively reverting to level seen just before the crisis hit – already multi-year highs, as this pandemic is not restraining enthusiasm for US mortgages, where rates are at their lowest ever, with the 30-year benchmark closing in on 3.0%.

What we are watching next?

  • Signals from the Fed – we have the FOMC minutes up today, but the calendar ahead could contain far more pivotal developments from the Fed, which will soon release the results of its comprehensive policy review (time not give). More specifically, the Kansas City will host a video symposium (in lieu of the normal Jackson Hole, Wyoming symposium) that has been used in the past to hint at future policy steps. The market could react to any sense of urgency from any of the above on the Fed’s views on the state of the economy and guidance on next policy steps, especially yield-curve-control.

  • Brexit negotiations – Brexit talks to determine the post-Brexit relationship between the EU and UK are ongoing, and the Financial Times suggests that negotiations are already at risk of stalling over EU pushing back against the UK proposal for truckers’ access to the EU. Time is getting very short for a deal, and Boris Johnson has all along refused to consider an extension of the negotiation period.

  • Shape of US stimulus package - the market looks a bit complacent here, as US President Trump may be looking at agreeing only to a deal on terms that both Democrats and Republicans can agree on that could be as small at $500 billion, according to a Bloomberg news source. This is far smaller than the $3.5 trillion deal agree by the US House and even the $1.0 trillion package that Republicans were ready to move forward with.

Economic Calendar Highlights for today (times GMT)

  • 0900 – Eurozone Jul. CPI (Final)
  • 1230 – Canada Jul. CPI
  • 1430 – Weekly EIA Petroleum Status Report
  • 1800 – FOMC Meeting Minutes

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