Market Quick Take - November 19, 2020
Head of FX Strategy
Summary: The market mood has turned a bit more cautious yesterday and overnight, with equity markets generally losing steam after a recent run higher, although US small cap stocks remain an outlier on the strong side. US Retail Sales in October showed the weakest growth in six months, suggest a more cautious attitude and that the stimulus effects from the spring are fading.
What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities suffered a late downdraft yesterday, perhaps on the announcement that New York City will close all schools from today after the Covid-19 positive test rate hit 3%. Subway and bus service are also set for reduction. The sell-off took the S&P 500 index to an important local pivot zone between 3,575 and 3,550, a failure of which could bring on a test of 3,500 or lower, while the Nasdaq 100 never managed as robust a rally recently and if it continues to slip its hold on the 12,000 area that has held it back, could be in for a test of the important 11,500 area support.
- Bitcoin EUR (BITCOIN_XBTE:xome) - the Bitcoin (XBTUSD) rally is reversing a bit in today’s session with lower high and trading well below 18,000. Trading below 17,640, which is the prior session’s open, is most likely a key level do watch for further short-term selling pressure. Longer term it seems more institutional investors are considering Bitcoin as an alternative next to gold in portfolio as a new way to create anti-inflation and debasement components with low covariance to other risky assets.
- NVIDIA (NVDA:xnas) - shares were down 2% on FY21 Q3 earnings (ended on 25 October) despite strong revenue growth of 57% y/y and adjusted EPS of $2.29 up 57% y/y. Q4 revenue guidance at $4.8bn vs est. $4.4bn was also better than expected. However, it was the company’s guidance on the Data Center segment expecting revenue to be slightly down in Q4 that set the market reaction off. As we indicated in our earnings preview of NVIDIA, the rise in Bitcoin price will drive more crypto mining which will undoubtedly benefit NVIDIA’s earnings and our view is that NVIDIA putting out their data center guidance to be conservative.
- AUDUSD - for the US dollar outlook, we prefer to focus on its strength or weakness against the currencies more sensitive to risk appetite, like AUD. The AUDUSD pair has bobbed back toward the 0.7300+ area but has been unable to follow through higher for a test of the cycle top above 0.7400. Australia reported very strong jobs data overnight, but the AUD remains sensitive to risk sentiment, which took a beating late yesterday in the US, and China, as noted below, is disgruntled with a number of Australian policies. Technically, the AUDUSD doesn’t begin to show weakness until a failure of 0.7225/00 area support.
- EURJPY – JPY crosses are heating up across the board, with USDJPY trading below 104.00, but as is often the case, with other JPY crosses showing a higher beta to the JPY strength, like EURJPY and AUDJPY. Today we note EURJPY, as it has taken out the entire rally that materialized suddenly in the wake of the initial news of the success rate of Pfizer’s vaccine candidate last Monday. The last major Fibonacci retracement (61.8%) was tested this morning at 122.96. A further decline in risk sentiment and firm safe haven bond market could see the pair testing the cycle lows below 122.00. The Euro may also prove sensitive to signs that it continues to have trouble getting its new budget and recovery package passed.
- Gold (XAUUSD) trades lower for a fourth day as a steady reduction in ETF holdings and a short-term bearish technical formation weigh on the market. Despite a softer dollar and bond yields, sentiment has received a knock from the recent vaccine news, this despite an ongoing surge in Covid-19 cases potentially leading to more stimulus announcements. Platinum’s discount to gold has dropped to a five-month low at $930 on robust demand from automakers and investors through ETF’s. Gold remains technically challenged by an emerging bear flag with a break below $1850/oz potentially signaling a deeper correction to $1790/oz, the 200-day moving average.
- US Treasury yield curve stable as coronavirus cases rise in the US (10YUSTNOTEDEC20). The Treasury sold $27bn at a yield of 1.42%. Even though demand was lower compared to previous auctions, price was in line with the market Investors covered some of their short bond future positions as coronavirus cases are rising and New York is imposing new lockdown measures. There might be more upside for Treasuries before the yield curve resume its steepening.
- As Hungary and Poland block EU debt plan, there is more scope for ECB’s intervention (10YBTPDEC20, FBONZ0). In case the recovery fund gets delayed, we can expect the ECB to continue printing money in order to desperately support the economy. We therefore see upside for the periphery with Italian BTPs to be the main beneficiaries as they trade richer than their peers.
What is going on?
- Australian Prime Minister pushes back against Chinese grievances - Australia Prime Minister Scott Morrison pushed back against a document delivered to the Australian media outlining 14 grievances and accusing Australia of “poisoning bilateral relations”. Morrison vowed that “Australia will continue to be ourselves.” Recently, as a sign that China is leveraging its point with soft economic sanctions, it has reduced iron ore imports from Australia and this month ordered a halt to the purchase of Australian copper ore, wine and other products.
- Soybeans (SOYBEANSJAN21) has reached a four-year high in Chicago with U.S. sourced beans now relatively cheap as the driest three-month period in Brazil, the world’s biggest producer, continues to threaten production there. Chinese demand look set to remain strong due to rising feedstock demand and as the Chinese currency continues to strengthen. At $11.75/bushel, the front month January contract is getting close to $12.08/bushel, the June 2016 high. The same focus on Brazil dryness together with recent BRL strength has also helped boost Arabica coffee (COFFEENYMAR21) to a two-month high.
What we are watching next?
- US initial and continuing claims. US claims data are noisy but still our best real-time indicator on the economic activity level on the ground. US claims data are a core component of the new NY Fed Weekly Economic Activity Index which is currently at -2.77% for the week ending 14 November down from -2.24% the week before indicating that the US economy is still lower from a year ago. Despite the lack of new US stimulus, the private sector seems to be healing at a good pace most likely bringing the US economy back to growth in January.
- Next steps for the EU after Poland and Hungary vetoed the proposed EU budget - the two CEE countries, although standing to benefit far more than most other EU nations from the proposed 2021-27 budget and special pandemic relief package, torpedoed the proposal on the first vote, as the two countries object to stipulations that would only allow the outlays if the recipients followed a number of “rule of law” principles. Today, EU leaders are set to meet via video today, but the path forward looks impossible with these rule of law limitations.
- Turkish Central Bank to raise rates, already in the TRY price? After Turkish president recently signaled that he is willing to accept the “bitter medicine” necessary to stabilize the country’s currency, the Turkish lira strengthened sharply, by more than 10% against the US dollar in the space of a week recently. Today is the next step for the currency as the Turkish central bank is meeting today to announce the new policy rate, with consensus eyeing a move of 400-500 basis points, to bring the headline rate to 15.00% (that would require a 475-bps hike).
Q3 earnings season continues this week. The list below shows the largest companies reporting this week:
- Today: Tokio Marine Holdings, NetEase, Ross Stores, Intuit, Workday, Knorr-Bremse
Economic Calendar Highlights for today (times GMT)
- 0830 – Sweden Oct. Unemployment Rate
- 1100 – Turkey Central Bank Rate Announcement
- 1330 – US Fed’s Mester to open Financial Stability Conference
- 1330 – US Weekly Initial Jobless Claims and Continuing Claims
- South Africa SARB Interest Rate Announcement (no time given)
- 1500 – US Oct. Existing Home Sales
- 1530 – US Weekly Natural Gas Storage
- 2330 – Japan Oct. National CPI
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