Market Quick Take - August 20, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  Equities dropped late yesterday and overnight in the wake of the FOMC minutes, which seemed to show a rather lukewarm view of yield-curve-control and a less aggressive intent to provide guidance on the path of interest rates that had been signaled in an earlier meeting. Gold was also under pressure and the US dollar rose sharply after recent new lows.


What is our trading focus?

  • S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – US equities are down 1.1% since the release of FOMC Minutes as the Fed downplayed yield-curve control (YCC). The pricing of equities is driven by the idea that interest rates would stay low for longer forced by the Fed and thus some this pricing must be unwound. Nevertheless, we are not buying the Fed and believe YCC will be introduced and that real yields will come down even further. Sentiment is still strong, and any meaningful dip will most likely be bought. The intraday support level on Aug 14 at 3,350 has proven again today to be the support level, so traders should obviously be alert to this level on the downside.

  • STOXX 50 Index (EU50.I) – European equities are struggling post FOMC Minutes despite a weaker EUR downplaying the importance of currency for direction in equities. New COVID-19 cases are still rising in several European countries including France increasing nervousness over the economy but also a summer holiday season that did significantly less for Southern Europe than expected back in June. Europe’s equity market also has more cyclical companies as thus more sensitive to interest rate changes and slowdown in the economy. We remain constructive on European equities.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - dropped yesterday following the Fed minutes (see comment below) as they were taken as being gold negative given the lack of commitment to yield-curve control. The metal however has so far managed to bounce after finding support near the previous high from 2011. In our latest commodity webinar we focused on the developments that have driven gold and silver to these elevated levels while also highlighting the reasons we maintain a bullish outlook. An outlook that hasn’t changed following yesterday’s FOMC minutes. Gold will however, as we have warned this week now face a period of elevated volatility as the market needs to adapt and adjust to these new higher levels. Resistance at $2015 with support in the $1900-$1920 area.

  • Brent Crude Oil (OILUKOCT20) and WTI Crude Oil (OILUSSEP20) - both remain stuck in a narrowing range with the market struggling to find the trigger that could ignite some life into a market that has done nothing since June. The slight weakness since yesterday occurred despite a bullish weekly storage report from the EIA. Instead the market drifted lower after the Fed said the pandemic would weigh heavily on economic activity. An outlook that was mirrored by the OPEC+ group which concluded their JMMC meeting by reiterating the importance of compliance, after warning that the pace of the demand rebound was slower than expected. News from Libya that commander Hafter had allowed the reopening of ports could potentially add additional barrels to the market over the coming weeks and months. Brent remains stuck between its 50-day moving average at $40.65 and the 200-day at $43.30.

  • EURUSD a very interesting day yesterday for EURUSD, which may have just suffered a key tactical reversal as the new highs above 1.1900 were rejected on the session as the US dollar staged a broad comeback, both before and after the release of the FOMC minutes. The reversal starts to become more complete with a move below the 1.1800 level, which could open up a run for the major range support area around 1.1700. Bulls will need a quick erasure of this sell-off to reverse the implications of yesterday’s developments.

  • GBPUSD the USD backed up sharply across the board yesterday, just a day after fresh notable lows in many pairs like GBPUSD. With this pair, unlike some other USD pairs, the move was both a product of USD strength and GBP weakness, encouraging the idea that the rally above 1.3250 in GBPUSD was a false breakout.

  • Adyen (ADYEN:xams) - the Dutch payment company that has enjoyed a spectacular rally since the March bottom and gaining momentum following the Wirecard scandal delivers 1H results this morning. Revenue jumped to €280mn vs est. €274mn, but EBITDA came a few percentage points below estimates. The company says that it is winning retail clients from Wirecard in the APAC region and reaffirms the medium and long-term outlook.

What is going on?

  • FOMC minutes spook the “easy Fed” narrative at the margin as the minutes showed a rather cool view of yield-curve-control policy, given that long interest rates are already low, with some members concerned that a policy could lead to “excessive” balance sheet growth and even those members in favour of the policy suggested it was a way merely to slow the pace of Fed purchases.  A shift in the intent to provide further forward guidance from here was also noted, with less urgency seen than in previous language.

  • COVID-19 cases spiking in Europe – Germany reported another day over 1,500 cases, France reported 3,775 cases and Spain reported over 3,700 cases after the prior few days seemed to show a falling case count there from last week’s higher levels. French president Macron said that bringing France to a halt to fight infections is not an option, as the country will have to rely on local strategies.

  • US formally ends three pacts with Hong Kong – after China recently enacted a new security law for Hong Kong, the US has now suspended its extradition treaty with Hong Kong and ended reciprocal tax agreements. The extradition treaty suspension follows similar moves by the UK, Australia, Canada, Germany and France.

  • The world’s largest oil rig owner Valaris files for bankruptcy adding another casualty to the long list in the energy sector with Noble and Diamond Offshore Drilling already filing for Chapter 11 due to the pandemic.

What we are watching next?

  • Were the FOMC minutes a game changer? Probably not, but... – We doubt that the “hawkish” impression from the FOMC minutes will endure for long, but despite our constructive view, bears will argue that we may have just witnessed a tactical pivot across markets that could endure for more than a session or two, especially given the overhanging uncertainty of the US elections, where a Democratic victory could mean a reset of tax policy expectations.

  • Shape of US stimulus package - we are still awaiting the status of the US stimulus package, with more negotiations possibly delayed by the Democratic National Convention, which wraps up tonight with an acceptance speech from Democratic candidate Joe Biden.

  • Can Copper (COPPERUSSEP20) manage a weekly close above the previous high? If yes, it could see the metal extend its strong recovery from the March low. A drop in inventories at LME monitored warehouses to a 13-year low, supply cutbacks and the recent dollar weakness has been cited as the main drivers behind the renewed momentum. We remain sceptical that the all the metal drawn from warehouses have gone towards consumption but for now the bulls are in control.

Economic Calendar Highlights for today (times GMT)

  • 0730 – Sweden Jul. Unemployment Rate
  • 0800 – Norway Deposit Rates
  • 1100 – Turkey Central Bank Decision
  • 1230 – Canada Jul. Home Price Index
  • 1230 – Canada Jul. ADP Payrolls
  • 1230 – US Weekly Initial Jobless Claims / Continuing Claims
  • 1230 – US Aug. Philadelphia Fed Survey
  • 1430 – US Weekly Natural Gas Storage
  • 1600 – Bank of Canada Deputy Governor Beaudry to Speak

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