Market Quick Take - October 14, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  US equities were largely sideways yesterday after the blowout rally on Monday. The US mega-banks JP Morgan and Citigroup reported positive earnings results relative to expectations, but their share prices dropped on the day as investors were concerned that the results were due to one off factors. Goldman Sachs and Wells Fargo report today. Elsewhere, the US dollar ticked higher and gold lower.


What is our trading focus?

  • Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities tried to poke higher still yesterday in early trading, but ended the day in largely sideways fashion after a choppy session and after a negative reaction to the highest profile earnings reports from the big US banks yesterday. The last major resistance levels for both indices are the all-time highs posted in early September at 12, 445 for the Nasdaq 100 and 3,576 for the S&P 500 Index. We noted after Monday’s session that an acceleration to the upside in an already strong market has in the recent past pointed to a destabilization risk that could result in a sharp consolidation back lower at some point.

  • Airbus (AIR:xpar)  - Airbus bears watching today after US airline Delta announced a delay in $5 billion worth of airplane orders after reporting disappointing earnings yesterday. Shares have fallen sharply over the last two days.

  • Apple (AAPL:xnas) - Apple showing very volatile behavior on options trading, iPhone event - Far and away the world’s largest company by market cap, Apple shares have shown huge volatility over the last two sessions – spiking over 6% higher on Monday only extremely heavy call options trading, only to slump yesterday by over 2.5% on the day of Apple’s iPhone event announcing new iPhone 12 models with a wider range of specs and prices. Apple’s new product launch live-stream was loudly absent from Chinese social media yesterday.

  • EURUSD and AUDUSD – yesterday’s price action was a significant set-back for USD bears as the big dollar rallied hard across the board (outside of USDJPY as the JPY largely managed to match the greenback’s gains – a correlation in the crosses we have noted on many occasions and one that is likely set to continue.) There was no readily identifiable trigger for the move, but as it came just after the US dollar was breaking down through support levels suggest it may have been triggered by stops linked to new positions around that development. As well, with US election uncertainty still looming within weeks, it’s questionable whether investors want to take large directional bets on the outcome.

  • GBPUSD and EURGBP it is crunch time for the post-Brexit transition period deal with Boris Johnson’s October 15 deadline looming into view tomorrow as noted below. Traders should position for potentially large movement in sterling pairs in either direction, with very significant downside risk if the talks collapse for now with no outcome as the market looks poorly positioned for bad news. The UK is also dealing with an ugly spike in Covid-19 cases and politicians may consider regional lockdowns to address the resurgence of the disease.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - precious metals tumbled yesterday as the US dollar surged, with the triggering even apparently the in-line US September CPI report, as this marked the beginning of the selling. The sell-off took both metals to the bottom of the choppy rising channels – and even slightly below in gold’s case overnight as it traded below 1,886/oz. The equivalent silver level is just below 24. A break of these channels could lead to a more profound consolidation, with both eyes for traders on the US dollar here, as gold seems to show little independent movement relative to other markets.

  • Italian Government 10-year (10YBTPDEC20). Italian BTPs continue with their rally. Yesterday’s auctions have been successful, and for the first time ever, Italy was able to issue a 3-year BTPs paying 0% in coupon. This happen amid a surge in coronavirus cases that are pushing the country to impose new restrictions and may hurt the economy.

What is going on?

  • Eli Lilly (LLY:xnys) vaccine trial paused on safety concerns - This headline comes just a day after Johnson and Johnson had to halt its own vaccine trial due to a patient in trials taking ill. In Eli Lilly’s case, the halt in enrolling participants in the trial was due to a recommendation from an independent data safety monitoring board. The specific reasons for the halt to the trial were not made public. The Eli Lilly vaccine is said to be similar to the therapy administered to US President Trump. Eli Lilly shares slumped more than 2.5% yesterday.

  • Citigroup and JP Morgan dropped on the day after reporting headline earnings beats – the strong headline numbers on earnings from these two banks failed to boost their share price as traders figured that the gains from things like lowering loan loss provisions and higher trading activity might not be repeatable down the road. JP Morgan shares were down some –1.6% on the day, while Citigroup’s shares were stung with a loss of –4.8% as the bank noted higher costs on a large regulatory penalty for failing to fix deficiencies in infrastructure and controls that could be costly and take years to address.

What we are watching next?

  • US stimulus prospects still a key question mark this week. Yesterday saw Democratic House leader Pelosi demanding an improved stimulus offer from the Trump administration while Republican Senate leader McConnell proposed a smaller package that Pelosi rejected. Trump himself also poo-poohed a McConnell proposal to vote on one provision with a tweet to “Go big or go home!”. The market is apparently very complacent on stimulus, figuring that the lack of stimulus now may not be a problem in a Democratic sweep of the presidency and the Senate in the election, which will bring staggering levels of stimulus early next year. Trump himself may feel little urgency if he is using the stock market level as a barometer of stimulus uncertainty. The Senate is also distracted by the attempt to ram through a Supreme Court nomination within weeks of the election.

  • Brexit deadline looms tomorrow – large two-way tactical risks for GBP. Yesterday failed to produce any positive headlines as negotiation between the EU and the UK continued ahead of the October 15 deadline tomorrow that Boris Johnson has declared for making a deal. An EU Summit also starts tomorrow and ends on Friday. Sterling edged back lower, likely led by GBPUSD, with surrendered the 1.3000 level on a burst of USD strength, but EURGBP also bobbed back higher. There are notable two-way risks for GBP here if the two sides are unable to come to basic terms tomorrow – the market doesn’t look ready for bad news for sterling. On the other hand, headlines touting a sudden breakthrough in talks that point toward an amicable deal would likely provide a very meaningful GBP boost. UK Prime Minister Boris Johnson and EU Commission President Ursula Von Der Leyen are to speak today.

  • US Q3 earnings season set to continue today with Goldman Sachs and Wells Fargo. As noted above, the negative reaction to Citigroup’s earnings release could be repeated with the US’ largest Main Street bank Wells Fargo (WFC:xnys) if it reports similar challenges. Also reporting today are Bank of America (BAC:xnys), Goldman Sachs (GS:xnys)and the two airlines American Airlines (AA:xnys) and United Airlines (UAL:xnys) Given analyst expectations for a strong rebound in earnings in Q3 there is a lot at stake the next two months. If earnings disappoint it could be a major roadblock for equities and potential a strong catalyst for a setback.

Economic Calendar Highlights for today (times GMT)

  • 0800 – ECB President Lagarde to Speak
  • 0900 – Euro Zone Aug. Industrial Production
  • 1200 – ECB Chief Economist Lane to Speak
  • 1230 – US Sep. PPI
  • 1300 – US Fed’s Clarida (Voter) to speak on US economic outlook
  • 1600 – UK Bank of England’s Haldane to Speak
  • 2200 – Australia RBA’s Lowe to Speak
  • 0030 – Australia Sep. Employment Change / Unemployment Rate
  • 0130 – China Sep. CPI

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