Chief Macro Strategist
Summary: Market sentiment remains shaky as broader US averages dropped slightly, and in virus-hit Europe, the German DAX index closed below its 200-day moving average for the first time since June. US treasury yields have tumbled back lower, wiping away most of their recent advance, helping to propel the Japanese yen to new highs and the USD is broadly firm as well. Still no US stimulus in sight as the number of days before the election dwindle.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - yesterday’s price action was more evidence of the K-shaped recovery and equity market with technology stocks gaining while the broader market had trouble. This morning S&P 500 futures are struggling at Monday’s lows weighed down by no breakthrough in US fiscal talks and France considering imposing a new national lockdown to curb the Covid-19 outbreak. Nasdaq 100 futures are will off the lows from Monday and last night’s earnings from Microsoft have eased fears of negative surprises from the cloud industry. If S&P 500 futures cannot hold above Monday’s lows the next support level is most likely down at the 100-day MA around 3,300.
Stoxx 50 (EU50.I) - European equities are in a correction mode down more than 10% from their local peak as galloping Covid-19 cases are overloading hospitals forcing France to consider a new one-month national lockdown. Earnings releases from Europe have so far been better than expected but the news has drowned in the negative Covid-19 narrative which is increasing the probability of a new recession.
USDJPY and EURJPY – the JPY continues to run higher after USDJPY 105.00 broke down recently and the strong bid in US treasuries is a strong wind at the yen’s back, with broadly weak risk sentiment also a net positive. At current levels this morning in the low 104.00’s, USDJPY is trading below its lowest weekly close since 2016 as the ground toward 100.00 may be opening up. The euro is even weaker than the US dollar and EURJPY is facing down its own local key level near 122.40, the lows since July, with a break there taking the focus toward the 200-day moving average at 121.15. The yen has been a neglected currency and traders could wake up to the potential for heavy hedging flows if the yen strength continues. Relative real interest rate developments in recent months suggest that the JPY is drastically undervalued relative to both the USD and the EUR.
EURGBP and GBPUSD – Brexit negotiations have been extended at least through today and given that this was the timeframe announced at the beginning of this week, we should expect a headline or two today on the latest status of the negotiations, although sources like the Irish foreign minister suggest that a Brexit deal was likely on more like a 10-day to two-week time frame. The focus for sterling traders in EURGBP is on 0.9000 and for GBPUSD the recent 1.3175 area high if sterling is set to rally here. We have noted the risk that any breakthrough in talks could be met with limited enthusiasm and a rather low ceiling for sterling as the UK faces the headwinds of Covid-19 and a weak structural outlook with less leeway to do fiscal stimulus due to still large external deficits.
Gold (XAUUSD) and Silver (XAGUSD) continue to struggle for direction with gold being stuck inside its established $1885 to $1930 range. Current support coming from lower bond yields as the continued surge in coronavirus cases in Europe and the U.S. hurt the general level of risk sentiment while raising the prospect for additional fiscal and monetary measures. A surge in Chinese September gold imports to a six-month high also helping to off-set a stronger dollar. The option market activity is squarely focusing on the upside ahead of the U.S. elections next week. Of the top ten most traded options strikes in the biggest gold (GLD:arcx) and mining (GDX:arcx) ETF’s we find almost no puts.
Brent crude oil (OILUKDEC20) and WTI crude oil (OILUSDEC20) - following earlier gains on hurricane Zeta worries, the pendulum swing back against oil late yesterday after the API said inventories rose by 4.6 million barrels last week, the dollar rose on European virus and BP saying the pace of the recovery in oil demand remains uncertain. Worries about fuel demand in the U.S. and Europe on surging virus cases are being somewhat offset by robust demand from Asia. Libyan production meanwhile continues to recover from less than 100k barrels/day recently to potentially reaching 1 million within weeks. Brent remains stuck in a $39 to $44 range and WTI between $37 and $42 with focus on the EIA stock report at 14:30 GMT.
Turkey central bank today publishes 2020 fourth and final inflation report (ITKY:xmil). Inflation was forecasted to close the year at 8.9% in the previous report, it will be important to see if the central bank will rise expectations. An upward revision of inflation together with rising geopolitical tensions might push Turkish assets further down.
Microsoft (MSFT:xnas) - FY21 Q1 (ending 30 September) earnings release was stronger than estimated with revenue at $37.2bn vs est. $35.8bn and EPS $1.82 vs est. $1.55 up 12% y/y and 30% y/y respectively. The pandemic continues to drive adoption of cloud and other online services across all business segments. Given the weak backdrop from Intel and SAP earnings we think the market was very pleased by the beat from Microsoft despite the 1% sell-off in extended trading on maybe a bit conservative Q2 outlook.
Deutsche Bank (DBK:xetr) - Q3 net revenue was better than expected at €5.94bn vs est. €5.58bn and pre-tax profit was €482mn vs est. €181mn. Germany’s largest bank still sees net revenue flat for 2020. DWS (asset management and ETF arm) is doing better than expected and FIC segment is doing much better than expected together with the rest of the investment bank. Deutsche sees unchanged loan loss provisions for Q4 vs Q3. Overall, earnings to the good side.
What is going on?
Are we headed for full Covid-19 lockdowns across much of Europe? With numbers in many European countries spiking out of control, full lockdowns are said to be back on the agenda. French President Macron will hold a televised address Wednesday evening to announce new steps which may include a one-month lockdown. In Germany, Merkel has proposed closing German bars and restaurants for one month. This will raise the pressure to bring new massive fiscal stimulus to replace lost incomes, etc. With the Covid-19 epicentre now clearly in Europe, the euro is trading weakly ahead of tomorrow’s ECB meeting.
The Russian ruble slipped sharply yesterday after a Kremlin aide said there was more room for monetary easing. The aide claimed there is more room for easing as long as inflation remains below 4.00% after the government has done its duty with “massive fiscal stimulus”. The key USDRUB rate rose sharply to well above 77.00 - this after nearly touching a one-month low at the start of the week. Holders of Russian assets have to be looking at weak oil prices with some trepidation, as well as the situation near Russia’s border in Azerbaijan as the hot war over the Armenian population enclave of Nagorno Karabakh in that country rages. As well, a Biden victory in the US election would likely bring with it the risk of new sanctions.
What we are watching next?
Ant Group IPO, the “Amazon of money” – set for November 5 in Shanghai and Hong Kong. Jack Ma’s fintech giant that runs the Alipay platform is set to raise about $34.5 billion, a listing that will be the biggest IPO ever. At a rumoured market value of around $315 billion it will rank next to JPMorgan Chase & Co and effectively be the fastest wealth creation in the modern time. It has already created a frenzy among investors desperate to get a slice with Hong Kong stockbrokers offering as much as 20 times leverage to retail investors. Alibaba will hold around 32% of Ant shares after the IPO.
US election odds shifting against Democrats? The national US polling averages ahead of the election continue to show a commanding Biden lead, but that lead has shrunk perceptibly from over 10% to closer to 9% in recent days, and the predicted market for whether the Democrats can take the Senate has dropped back to 57% after trading as high as 70% at the beginning of the month. Whether the Democrats can take a majority in the Senate is a huge issue in this election, as Biden will have a hard time getting anything done on stimulus without both houses of Congress on side. See more on the election in our new daily series of articles counting down the US election from John Hardy.
ECB meeting tomorrow - the market is looking for a major new QE expansion from the ECB, at either this week’s meeting or in December, with the mounting toll from Covid-19 perhaps tilting the odds more in favour a move now rather than a wait until December, although the latter could be more likely because of dissenting voices on the Governing Council and as the December meeting will be accompanied with the latest economic projections. Hard to tell whether the ECB can really move the needle, as the policy ball is in the EU’s court, as fiscal stimulus is far more powerful and the key issue as Covid-19 rages in Europe.
US Q3 earnings season continues and picks up this week. Earnings from both US and European companies continue to surprise across both revenue and earnings. The reaction has so far been that companies meeting expectations have fallen a bit while those that miss are hit hard like we saw with SAP on Monday. The list below shows the largest companies reporting this week.
Economic Calendar Highlights for today (times GMT)
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