Market Quick Take - August 31, 2020

What is our trading focus?

• S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – US equity futures are back to posting record highs for the cycle to kick off the week, with the broader market outperforming the more concentrated Nasdaq-100 index in Friday’s session. We have noted that the price action has steepened to the upside, which at times in the past has become a destabilizing factor that brings higher volatility, if on an unknown time frame. Back in early 2018, the acceleration to a steeper timeline lasted for about a month.
  
  
• STOXX 50 Index (EU50.I) – European equities are higher this morning together with global equity markets starting the week on a positive note driven by good PMI figures out of China suggesting the world’s second-largest economy continues to expand. Technically the 3,300 is the critical support level with the 200-day moving average sitting just below, and on the upside the 3,350 level is the key resistance level.
  
  
• Spot Gold (XAUUSD) & Spot Silver (XAGUSD) start the week near a two-week high after Fed Chair Powell said nothing last week to hurt the current bullish narrative. Bloomberg reports that the Ohio Police and Fire Pension Fund have joined Warren Buffett’s recent move into gold. It has approved a 5% allocation to gold to help diversify and to hedge against inflation. The big question remains how many funds will follow over the coming months, thereby potentially creating an additional layer of support. Renewed weakness in real yields and a softer dollar helping to underpin the markets this Monday with the overall range for gold still between $1900/oz and $2015/oz. Silver meanwhile continues to challenge $28 resistance which potentially could see it challenge XAUXAG support at 69.40.
  
  
• WTI Crude Oil (OILUSOCT20) & Brent Crude Oil (OILUKOCT20) - trades steady with the market focus returning to the fragile demand recovery as second waves of Covid-19 continue to emerge, not least India which reported 78k new cases on Sunday. Chinese PMI edged lower in August but stayed in expansion territory. The aftermath of last week's U.S. hurricanes will be felt for a while with more than 1 million barrels/day of oil production still offline while refineries begin to restart production. WTI is anchored around $43/b while Brent crude remains stuck within a narrowing range defined by the 50-day moving average at $43.75 and the 200-day at $45.75 (Note: Brent October contract expires this week).
  
  
• EURUSD – the USD has dropped to new cycle lows against several DM currencies, but the EURUSD remains a holdout and still locked in the persistent range. A solid break above the recent highs and especially clearing the psychological 1.2000 level would mark a new degree of USD weakness. One concern for USD bears remains extraordinarily heavy speculative positioning, as the US futures market has never been as long of EURUSD as it was last week, with a record 212k contracts long as of last Tuesday.
  
  
• AUDUSD - the AUDUSD surged to close at a strong new high for the cycle last Friday well above 0.7300 after Asian market stabilized quickly on Friday after the announcement of the Abe resignation. Further supporting the Aussie, iron ore prices jumped higher again overnight after a recent period of weakness. Tonight, the RBA meets and is struggling with an economy that is booming in the mining sector but suffering in the bigger, services-led sector. With the currency soaring, it will be interesting, as noted below, whether the RBA begins to raise the level of concern on the currency and whether this can upset this bullish break higher. Technically, few chart resistance points higher from here, but the round 0.7500 area is the next focus.
  
  
• Mitsubishi (8058:xtks), Mitsui (8031:xtks), Sumitomo (8053:xtks), Itochu (8001:xtks) and Marubeni (8002:xtks) - all five Japanese trading companies rose sharply in Monday trading on news over the weekend that Warren Buffett’s Berkshire Hathaway has taken stakes in these companies in another bet on the commodities sector.
  
  
• Zoom Video Communications (ZM:xnas) - reports Q2 earnings today after the close. The video conferencing company rose to prominence in Q1 during the global lockdowns due to COVID-19 as work-from-home forced many companies to invest in software that could facilitate a remote collaboration between employees. As a result, Zoom’s revenue in Q1 rose 169% y/y and analyst estimates suggest more growth in Q2 with the growth rate y/y jumping 243% y/y to $500mn for the quarter.

What is going on?

• COT on commodities - Hedge funds continued to accumulate bullish commodity bets in the week to August 25. The total net-long across 24 major commodity futures reached 1.7 million lots, the highest since 2018. Just like recent weeks it is the continued demand for the agriculture sector that is driving the demand. During the past ten weeks, the net-position across the 13 agriculture commodities tracked in our report has gone from a 333k lots net-short to the current 491k lots net long. Weather concerns, a weaker dollar, strong Chinese buying as well as the emerging inflation theme have all helped improve prospects. More in our weekly update.
  
  
• Berkshire Hathaway buys stakes in five Japanese trading companies in another bet on the commodities sector following its recent stake in gold miner Barrick Gold and natural gas pipeline and storage facilities from Dominion Energy. The Japanese trading companies have strong cash flow generation and cannot easily be replicated thus providing a competitive advantage something Berkshire Hathaway is always looking for. The move is a sign that some of the most well-connected investors in the world are increasing exposure to commodities and diversifying out of USD assets on the backdrop of the Fed’s new monetary policy of average inflation targeting.

What we are watching next?

• US Fed Vice Chair Clarida to speak today - Clarida is seen as influential on the policy front, so Fed watchers will be sensitive to any hints provided by Clarida today that are more specific than some of the rather vague wording in Fed Chair Powell’s major speech on the results of the Fed’ long term policy review last week. The speech will cover the same subject and is billed as “The Federal Reserve’s New Monetary Policy Framework.” There will be a Q&A.
  
  
• Australia Reserve Bank set to meet tonight – any additional FX focus? – As Australia’s central bank releases its latest statement tonight, we’ll be looking closely at any suggestion that the central bank and its governor have any growing concerns about the strength of the Australian dollar, which pulled strongly higher to close last week at a new cycle high. This would come after Governor Lowe said in late July that he would like the AUD lower, but that it is not overvalued. This could underline the risk of a “competitive devaluation” theme in FX, a.k.a., new risks of a currency war, if deflationary risks in the near term are greater than inflationary ones down the road.
  
  
• Global state of the economy as we have a busy week ahead on the economic calendar, with global August Manufacturing PMI’s up for most major countries tomorrow and the Services PMI up on Thursday, followed by the latest monthly payrolls change and unemployment rate for the US on Friday.

Economic Calendar Highlights for today (times GMT)

• 1200 – Germany Aug. Flash CPI
• 1300 – US Fed Vice Chair Clarida to Speak on Monetary Policy
• 2330 – Japan Jul. Jobless Rate
• 0030 – South Korea Aug. Manufacturing PMI
• 0030 – Japan Aug. Manufacturing PMI
• 0430 – Australia RBA Cash Target

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