Market Quick Take - July 6, 2020
Chief Investment Officer
Summary: Asian stocks, led by Chinese equities, rose overnight following positive comments on the market from Chinese state media. Benchmarks across the region followed while U.S. remain bid, thereby supporting risk appetite across other markets such as crude oil. It highlights the markets ability and willingness to look through rising infection rates towards an anticipated recovery. The dollar trades softer as the euro mount another upside challenge. A thin week in terms of economic news will give the market plenty of time to prepare for the U.S. earnings season, kicking of next week.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – the S&P 500 is starting the week pushing above the intermediate local highs from 16 June around the 3,156 level which happened during the initial rebound from the sharp selloff on 11 June. This is technically a strong short-term momentum setup for pushing towards the highs from 8 June around 3,231. The Nasdaq 100 pushed briefly beyond 10,500 in early trading continuing its ascent despite record high valuations in the Nasdaq Composite Index.
- OILUSAUG20 (WTI) OILUKSEP20 (Brent) - both challenging resistance with the continued bid in stocks providing most of the short-term inspiration. The fundamental stalemate between virus related demand worries and OPEC+ production cuts, has driven volatility – using Average True Range (ATR) - down to January levels. Focus this week will be the monthly overview of the worldwide oil market from the IEA on Thursday. EIA’s weekly report on Wednesday will be watched closely for any signs of a renewed slowdown in fuel demand. This as the number of new virus cases rise across the most populous U.S. states. A Brent break above $44/b would likely trigger an attempt to close the gap to $45.18/b.
- EURUSD - is following crude oil and equities higher this morning setting it up for a test 1.1300 which turned out to be a strong resistance level last week. Comments over the weekend from ECB’s Villeroy that the French recovery looks better than expected is also fueling EUR sentiment.
- BNK:xpar (European banks) - focus on European banks today after last week’s momentum ending Friday a bit lower and just below the 100-day moving average which was also the key resistance level back at the local highs on 8 June. A firm break above this moving average today could see European banks higher over the week.
What is going on?
- Asia equities starting the week on a strong note with Chinese equities up 6.7% driven by a bullish front-page editorial in the state-run Chinese Securities Journal extending sentiment off last week’s strong Caixin Services Index reading of 58.4. Retail investors dominating the Chinese equity market are buying the story about the prospects for a healthy bull market. The strong move in Chinese equities seems to be cascading into other markets such as developed equities and crude oil.
- COVID-19 infections in the US continue rise over the weekend with signs of acceleration in hospitalizations and daily deaths across the Sun Belt risking the reopening of these economies. Other countries such as Japan and Australia have recently seen a resurgence in daily infections and India’s 7-day average daily infections continue to rise.
- German Factory Orders in May down 29.3% y/y which was worse than expected highlighting the impact from the slowdown in global activity from lockdowns in Q2.
- Coronavirus related developments have sent two growth dependent commodities in opposite directions. Cocoa has slumped back below $2200/t on worries that the pandemic will weaken chocolate demand at a time when there is expected to be ample supply coming from West Africa. HG copper meanwhile has almost erased the losses for the year, currently trading at $2.75/lb. Strong demand from China supported the rally during the early stages. During the past few weeks however the spreading of the virus has started to impact supplies from the world’s biggest production areas in South America.
What we are watching next?
- Whether the COVID-19 resurgence extends to hospitalizations and a rise in daily deaths. The US had its worst weekend in terms daily infections with ICU capacity becoming critical in many hotspots across the Sun Belt states such as Arizona, Texas and Florida.
- ISM Non-Manufacturing for June is published today with expectations looking for 50.0 reading up from 45.4 in May suggest that the services sector in the US is still struggling at much lower activity levels.
- Q2 earnings season starts next week which will be the most exciting in many years as 80% of S&P 500 companies skipped their guidance in Q1 leaving investors to fly blind into the storm. With US technology stock valuations at record levels there is little margin for error so any revenue miss could lead to steep declines.
- The market failed to take note of several failed COVID-19 trials last week with both Moderna and Regeneron issuing negative statements. Regeneron and Sanofi said their US Phase 3 trial was not a success against the placebo benchmark and Moderna was rumoured to have seen delays in its study.
- Corn traders will look towards the World Agriculture Demand & Supply (WASDE) report on July 10 for confirmation that the recent 10% rally can be sustained. Will the smaller than expected planted acreage announced recently be enough to make up for declining demand from ethanol producers thereby helping to keep inventories under control.
Economic Calendar Highlights (times GMT)
- 14:00 – U.S. ISM Non-manufacturing Index
- 19:15 – CFTC Commitments of Traders report, delayed release from Friday due to U.S. holiday
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