Market Quick Take - July 3, 2020
Chief Economist & CIO
Summary: US markets ended this holiday shortened week yesterday on a new high, although well off intraday highs, perhaps in part due to new restrictions imposed in many US cities as the country deals with the surge in coronavirus cases. US Payrolls gains were impressive, but weekly claims data are not as rosy - somewhat of a disconnect. Elsewhere, the market took another stab at selling the US dollar, but the move had largely fizzled into late trading.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – the US equity market saw a strong session yesterday, but one that eased a bit into the close, with suspense over the weekend as the S&P500 Index failed to take out the clear 3,150 resistance line and despite the new highs for the cycle in the Nasdaq-100 yesterday, some momentum indicators showing divergence with the price action if the rally falters here.
- XAUUSD (Spot Gold) and XAGUSD (spot silver) - Gold touched a one-week low following the stronger-than-expected U.S. job report but still managed its second highest close in this cycle. The metal was supported by another slump in U.S. 10-year real yields to –0.75%. While potentially in need of some additional consolidation we maintain a positive outlook with the key area of support being the 1745-1750 zone. Silver has returned to trade around $18/oz following the firm rejection above $18.40 and subsequent correction earlier in the week.
- BNK:xpar (European banks) - focus on European banks again today after German lawmakers accepted ECB explanations for their bond-buying program. European banks rallied 4.3% yesterday and the momentum could extend again in today’s session as the decision by German lawmakers provides certainty for the market and secures a stable funding situation in the euro area.
- EURUSD – the suspense continues for this super-major FX pair, as yesterday’s quick surge to 1.1300 was quickly beaten back in later trading yesterday, keeping the pair in an unbearably tight range of 1.1170 to about 1.1350 that hasn’t been broken for the last three weeks.
- GBPUSD and EURGBP – sterling remains perched near pivotal areas as Brexit talks have apparently proceeded with reasonable harmony. The EURGBP 0.9000 area bears close watching for whether sterling can mount a strong comeback, while GBPUSD is clearly pivotal around the 1.2500 level, which the bulls attempted to retake yesterday but failed to do.
What is going on?
- Asia equities fading overnight moves and momentum fading into the afternoon, potentially as traders take profits off the table into the holiday weekend after a week of gains. Particularly against the backdrop of the continued virus spread as California and Arizona both reported their largest increase in daily cases yet and confirmed cases are rising in 40 of 50 US states.
- German lawmakers back ECB bond-buying program in a broad alliance of parties paving the way forward for the current monetary policy in Europe. This will put focus on European banks in today’s session and especially the German and Italian banks. Over the past week European cyclicals and value stocks (include banks) have gained momentum so expect to see this continuing into the weekend.
- Confusing US employment numbers yesterday as the BLS released a better than expected Nonfarm Payrolls Change number of +4.8M vs. 3.0M expected, but at the same time the BLS said that some workers are misclassified, and that the unemployment rate is probably 1.0% higher than the 11.1% announced yesterday (vs. 12.5% expected and 13.3% in May). Meanwhile, it is tough to square this positive data with the weekly claims continuing to come in as high as they did last week at 1.43M vs. 1.35M expected and weekly continuing claims staying virtually unchanged at 19.3M vs a downward revised 19.3M the prior week.
- Brexit talks are ending the week on a relatively positive note (according to an article in Bloomberg quoting sources, the two sides are homing in on a “landing zone” and seem ready for compromise on a number of issues, and are aiming for a “stripped down agreement that includes a free trade deal eliminating tariffs and quotas”. The EU side seems more willing to step away from its position that the European Court of Justice must have jurisdiction over all disputes, among other issues. Negotiations will continue next week.
- Hong Kong’s Hang Seng index rose slightly, taking it to a new high since March yesterday even as the severity of the new security law passed this week has made it clear that protests and specifically, call for independence will not be tolerated. The UK and Australia have made overtones of offering asylum for some Hong Kongers wishing to leave, a move that has provoked China to threaten countermeasures.
- China Jun. Caixin Services Index surprises with a reading of 58.4 vs. 53.2 expected and 55.0 in May driving Chinese equities 1% higher in Asia session.
What we are watching next?
- Whether the Covid19 resurgence flattens the rebound – for example, the US data is truly looking in the rear-view mirror, only capturing the employment picture in the week ended June 13, and with the spread of the virus accelerating again, the same pace of continued improvement will be hard to come by. Job gains will slow with the virus resurgence and the July numbers will likely disappoint.
- Better than expected rebound raises expectations too quickly? The rebound in the data in the US has proven somewhat more V-shaped than in other areas and has let to record positive readings in Citi’s Economic Surprise Index for the US. With new consumer caution, the expiry of some benefits already in July, and new restrictions imposed as the Covid19 resurgence continues, the numbers my begin to disappoint relative to expectations.
- Monthly oil market reports from the EIA on Monday and the IEA on Friday will be watched closely for signals on how consumption is doing amid the current recovery in demand. The market will also examine OPEC+ compliance data.
Economic Calendar Highlights (times GMT)
- 0715-0800 Euro Zone Final Jun. Services PMI
- 0800 – Norway Jun. Unemployment Rate
- 0830 – UK Final Jun. Services PMI
- 1200 – ECB's Knot to Speak
- US Markets Closed for Independence Day
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