Summary: The global rally in stocks continues with the market increasingly pricing in a V-shaped recovery as policymakers unwavering support for asset markets and pledge to do more has succeeded in detaching markets from reality, for now. The dollar declined for a fifth day against its peers while the JPY dropped to the lowest since January against the euro. The long end of the US bond market saw yields rise to a two-month high while the 10-year Note yield was firmer by just two basis points. Brent crude trades above $40/b as an OPEC+ cut extension looks increasingly likely, HG copper has touched $2.50/lb, a key technical area following a strong rebound in China PMI, while gold is drifting lower in response to reduced haven demand.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – NASDAQ 100 is powering ahead and is now only 0.8% from a new all-time high which is almost certain to happen this week; the all-time high level is 9,763. US equities continue to be technically very strong with valuation metrics moving higher into overvalued territory as investors are clearly positioning themselves from a fast rebound to normal economic activity levels. This was also expressed in S&P 500 Dividend Futures Dec 2021 rising 3.4% yesterday to its highest levels since 18 March.
- OILUSJUL20 (WTI crude) and OILUKAUG20 (Brent crude) - Crude oil continued to climb with Brent crude moving past $40/b for the first time since March 6. The rally remains supported by the prospect of a now priced in OPEC+ cut extension when the group meet virtually later this week. The V-shaped recovery that the stock markets continue to signal also raising the prospect for increased demand and the potential for a production short-fall during the 2H. A comeback from U.S. shale oil producers and lower cut compliance from producers are two potential challenges going forward. Apart from OPEC+ news, today’s focus will be on EIA’s weekly stock report. The API saw another weekly decline at Cushing while refined product stocks continued to rise. This continued sign of below demand could eventually force refineries to cut demand for oil. Technical traders will focus on closing the March 6 gabs to $45.18 on Brent and $41.28 on WTI.
- COPPERUSJUL20 (HG Copper) - A near 20% rally from the March closing low has seen copper return to challenge key resistance around $2.50/lb. An area that until broken, when the covid-19 became a pandemic, had provided support on several occasions since 2017. Bulls are cheering the Caixin China services purchasing managers index rising to 55.0 in May from 44.4 in April. The price is currently trading within a rising wedge between $2.40/lb support and $2.50/lb resistance.
- ZM:xnas (Zoom Communications) - shares were down 2% in extended trading following the company’s Q1 earnings showing revenue increased to $328mn vs $203mn expected and EPS came out at $0.20 vs $0.09 expected, showing the boost some companies in the online transition has got from the COVID-19 outbreak. Zoom is lifting its FY revenue guidance to $1.78-1.80bn from previously $900-915mn and EPS guidance to $1.21-1.29 from previously $0.42-0.45. Despite the highest valuation among the 1,000 largest US stocks the price action in extended trading shows that the market is willing to support these valuation levels based on realised growth from online companies. The CFO said on the conference call that reopening of economies could negatively impact demand going forward.
- EURUSD - momentum in EUR is strengthening further with EURUSD moving above 1.12 this morning moving towards the resistance levels from late December which proved critical during the jump in EURUSD into 1.14 during the volatile month of March. As we see the momentum it is driven by headlines on the EU Commission proposal to issue joint euro debt and the ability to issue taxes on top of reopening of EU countries being ahead of US states. However, our strong view is that the EU Commission proposal will fail in its current form as it violates the standing EU Treaty and thus will have to be accepted in all the EU countries which we suggest history proves is very difficult.
What is going on?
- Unrest in the US continued yesterday as protesters defied curfews putting more pressure on President Trump as the US election is getting closer as the protests have increased his disapproval rating to about the worst levels for his first term as president.
- Sweden’s state epidemiologist Anders Tegnell is now admitting that knowing what he knows now Sweden would have chosen a different COVID-19 strategy, somewhere in between the current strategy and the rest of the world. He basically failed in risk management, and Sweden seems to be paying a high price being isolated by its neighbours and also experiencing the highest death toll per capita in the world.
- Bulls are cheering the Caixin China services purchasing managers index rising to 55.0 in May from 44.4 in April. Beware the diffusion index, which cites the directional month on month change, from what is currently a significantly reduced base. This is not a total activity measure.
What we are watching next?
- Nonfarm Payrolls and Non-manf ISM for May this week are critical US macroeconomic data points that give the first indications of the severity of the job market loss and potential rebound trajectory.
- Expectations are rising for ECB to expand its bond-buying programmes on Thursday to add stimulus while the political impasse in Europe continues to put the recovery at risk. The current €750bn ECB bond-buying programme PEPP (Pandemic Emergency Purchase Programme) will run out of bonds to buy by October in which the recovery will still be in a fragile recovery.
Economic Calendar Highlights (times GMT)
- 08:00 Markit Eurozone Services PMI
- 12:15 US ADP Employment Change
- 14:00 US Factory orders
- 14:00 Bank of Canada rate decision
- 14:30 EIA’s weekly crude oil and product stock report
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