Market Quick Take - October 21, 2020
Head of FX Strategy
Summary: Markets are in a holding pattern as the supposed deadline for a US stimulus deal came and went with no new deal in place, even as negotiations continue between House Democrats and the Trump administration. Elsewhere, US long yields rose to new highs overnight and the USD was weak as the USD posted a new 2-year low versus the Chinese yuan. The euro rose after extreme interest seen yesterday in the first joint EU debt issue.
What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities traded in a compressed range yesterday relative to recent trading sessions and futures were slightly up overnight despite news hitting of a US government anti-trust suit against Google in early trading and a weak earnings report from high-flyer Netflix after the close. More on both of those stories below. The key technical pivot zone for the Nasdaq 100 looks like the 11,500-11,600 area if the rally from the September lows is to hold. A similar area of interest in the S&P 500 comes in around 3,400.
- EURUSD – the USD was weak and EURUSD jumped higher and traded at a one-month high overnight near 1.1850, a significant technical development if the price action sticks above this area, arguing for a test of the 1.2000+ top from the summer. One of the supportive developments for the euro developed yesterday even before broad-based USD selling was in evidence was the extreme interest shown in the EU’s first issuance of truly mutual debt (see below).
- AUDUSD and USDCAD – the AUD has been held back by very dovish RBA comments recently that are clearly pointing to a rate cut at the November 3 RBA meeting and a likely shift to a proper QE policy. This has had AUDUSD eyeing the key 0.7000 area as recently as yesterday before USD weakness kept the pair well away from that figure. Other G10 USD pairs – especially USDCAD, are showing a rather weak USD at the moment, as that pair has sold off steeply in recent sessions, possibly on interest in AUDCAD shorting as the RBA situation has offered one of the few pronounced policy shifts in the G10 universe recently. That trade may be about exhausted as zero rates from the RBA are nearly already priced into the forward curve. Another factor holding up the AUD at the margin is the aggressive strengthening of the Chinese yuan, as USDCNY set a new more than 2-year low overnight.
- Thirty-year Treasury yields continue to rise (30YUSTBONDDEC20) - The US Treasury yield curve continues to steepen as a fiscal stimulus package looks likely to be agreed upon this week. The front part of the yield curve up to 10-year maturities is stable as the Fed controls it. If long term yields continue to rise the FED might decide to shift bond purchases on the long part of the yield curve.
- Netflix (NFLX:xnas) - shares were 5% lower in extended trading as Q3 EPS at $1.74 vs est. $2.13 was a disappointment while revenue came in line. Net change in subscribers was 2.2mn vs est. 3.3mn highlighting the app download decline as we pointed out in yesterday’s comments. Increasing competition and content fatigue are impacting the business momentum and Netflix’s Q4 guidance seems too aggressive, so there is likely further downside risk.
- Tesla (TSLA:xnas) - reports Q3 earnings tonight after the US market close. Analysts expect revenue at $8.3bn up 31% y/y and EPS $0.55 up 217% y/y as deliveries ramped up significantly in Q3 driven by strong demand in China and Europe. Credit sales was the big joker in Q2 and will likely be the most volatile component in Q3 as well. Competition is increasing everywhere, and Tesla has just recently lowered its prices to stimulate demand. We do not have a strong conviction on Tesla earnings.
- NextEra Energy (NEE:xnys) - reports Q3 earnings before the US market opens. Analysts expect revenue of $5.4bn down 2.5% y/y and EPS $2.59 up 8% y/y. The company is one of the biggest utilities in the US and developer of renewable energy units with a declared goal of changing its energy mix. The goal is to retire the last coal power plant in 2022. Valuation of NextEra Energy is quite aggressive with EV/EBITDA around 20x.
- Gold (XAUUSD) and silver (XAGUSD) both traded higher overnight as the dollar continued to weaken on renewed optimism about a U.S. stimulus deal. The CNY at a two-year high and the euro above €1.18 both receiving specific attention. A stimulus deal and speculation about a democratic clean sweep on November 3 have given the reflation traded renewed focus thereby supporting both precious and industrial metals. Having held support at $1894/oz, gold will now try to challenge resistance at $1925/oz followed by $1933/oz.
- HG Copper (COPPERUSDEC20) has following a short-lived correction in early October resumed its ascent and yesterday it broke higher to reach a two-year high. The rally has been supported by a stronger Yuan and supply disruptions at mining operations in Chile. While the longer-term outlook remains supportive as the green electrification agenda gathers momentum, the short-term outlook will be dictated by Yuan and strike developments. LME Copper, last at $6960/t, will now be targeting $7000/t, the equivalent of $3.20 on high grade.
What is going on?
- US long dated treasuries rose to their highest level since June. With the 10-year benchmark clearing 0.80% and the 30-year all the way above 1.60% overnight. The rise in yields suggests that the market thinks a stimulus deal (see below) will be forthcoming and that the Democrats are set to take both the presidency and the Senate at the November 3rd election and bring strong stimulation that is likely to boost nominal growth and inflation.
- EU’s first mutual “social bond” sees extreme buying interest – the EU’s first offering of “social bonds” that are the first proper Euro Bond issued directly by the EU (as opposed to by an individual member state) since the announcement of the pandemic recovery, effort drew offers of EUR 233 billion for the EUR 17 billion issues of 10-year and 20-year bonds. The interest in these AAA assets could be EUR supportive by offering an expanded supply of "risk-free" assets in the EU.
- Brent crude oil (OILUKDEC20) and WTI crude oil (OILUSNOV20) remain stuck in the low $40’s while Natural Gas (NATGASNOV20) has inched closer to challenge $3/mmbtu on rising flows to LNG export terminals and colder U.S. weather slowing injections into storage. Oil market focus today being the weekly stock report at 14:30 GMT after the API last night reported a surprise 0.6m barrels rise in crude stocks. Both products however are expected to show healthy reductions. Brent meanwhile remains stuck in a $41.50/b to $43.50/b range.
What we are watching next?
- US stimulus package status? The latest is that House Democratic speaker Pelosi’s deadline for a deal yesterday came and went with no decision, but the two sides continued to talk. Treasury Secretary Mnuchin made comments suggesting a deal is close on a deal closer to $1.9 trillion, while the chief question may be whether there is sufficient support for a deal among Senate Republicans to pass the deal, with Senator Mitt Romney arguing against a deal of the current size. Some argue that those Republicans up for election on November 3rd may be under more pressure to sign in favour of stimulus.
- The Brexit situation as the two sides are still talking about talking - the “stand-off” in Brexit talks is ongoing, but the UK’s David Frost and EU’s Barnier are still discussing how to proceed. Sterling has sold off on the fresh uncertainty on the status of talks. It appears that the key breakthrough needed is for EU to make key concessions on fisheries, while the EU is concerned about the UK’s plans for “state aid” of key industries, to keep a level playing field for UK and EU companies. Some sources on the EU side, according to Bloomberg, describe the UK’s position as theatrics and expect a deal by mid-November.
- FDA meeting on vaccine candidates set for this Thursday – with some of the reports that will be discussed around vaccine candidates to be released already today. It is unlikely any individual vaccine will achieve emergency approval now, but this meeting could give a sense of how promising some of the candidates in late stage testing may be and how close the FDA is to being able to make a decision.
- US Q3 earnings season continues and picks up this week: Tesla (today), Intel, American Express, NextEra Energy (today), Hermes International, Daimler.
Economic Calendar Highlights for today (times GMT)
- 0730 – ECB Listens Event (w/ Lagarde & Lane)
- 1230 – Canada Aug. Retail Sales
- 1230 – Canada Sep. CPI
- 1355 – ECB’s Lane to Speak
- 1400 – US Fed’s Mester (Voter) to Speak
- 1430 – US Weekly DoE Crude/Product Oil Inventories
- 1600 – US Fed’s Kashkari (Voter) to Speak
- 1800 – US Fed’s Beige Book
- 2230 – Australia RBA’s Debelle to Speak
- 0030 – Australia Q3 NAB Business Confidence
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