Market Quick Take - October 6, 2020
Head of FX Strategy
Summary: Equities have started the week on a strong note as US President Trump returns to the White House, even if questions linger about his condition. The US dollar has weakened further and is teasing near pivotal levels. Gold managed to close back above 1,900 per ounce even as long US yields spiked higher yesterday ahead of a string of US treasury auctions.
What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I): US equity futures are pausing a bit in early European hours after a strong session yesterday that saw S&P 500 futures gaining 1.6%. Strong Eurozone retail sales reaching a new record and better than expected US Services PMI added tailwind from macro. On the politics side stimulus hope is still present and yesterday smelled of the market pricing out the scenario for a contested election as Biden is gaining across polls.
- EURUSD and AUDUSD - the USD continues to tease closer and closer to the edge of a real breakdown as the 1.1800 area in EURUSD and he 0.7200-0.7250 area in AUDUSD come into focus here and we await further news on stimulus. Australia’s central bank, the RBA, at its meeting overnight expressed an optimistic hope that the unemployment rate could peak at a lower level than feared while saying it was still looking for ways to stimulate the economy further if needed. Another weaker close for the US dollar through the levels note above, together with stronger risk sentiment from a stimulus deal, would set sights lower still for the greenback – toward 1.2000 in EURUSD and 0.7400+ in AUDUSD.
- Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - both rallied on Monday as the dollar dipped on approved risk appetite amid optimism that lawmakers in Washington may still end up agreeing to another round of stimulus. Long maturity bond yields stablised after reaching a four-month high with traders increasingly pricing in a Biden win on November 3. Total holdings in exchange-traded funds backed by bullion reached a new record at 111 million ounces, another sign that investors are not yet done accumulating gold. We maintain a positive outlook and following Monday’s rejection in the low 1880’s the focus returns to resistance at $1920/oz.
- WTI Crude Oil (OILUSNOV20) and Brent Crude Oil (OILUKNOV20) - put in another strong recovery yesterday highlighting a market that remains stuck with the focus alternating between rising production, the pandemic’s impact on demand on one side and the prospect for a U.S. stimulus deal, weaker dollar and another hurricane threat growing in the Gulf of Mexico. Focus today, EIA’s monthly Short-Term Energy Outlook at 1600 GMT followed by the stock report from the American Petroleum Institute at 20:30 GMT. Having once again found support towards $39/b, Brent may have another go at the key band of resistance between $42.5/b and $43.25/b.
- Treasuries 30-year (30YUSTBONDDEC20) yields rose 14 basis points. Yesterday we saw the US yield curve steepening with the 5s30s spread widening by eight basis points. The 30-year treasuries yields have been rising 14 basis points in the day of yesterday. With President Trump returning to the White House investors expect the US election to run as planned, and the polls indicate easier election win by Biden. If the fiscal stimulus passes as well, we can expect a bear steepener to continue.
- Regeneron (REGN:xnas) - shares were up 7% yesterday as news broke that US president Trump had been treated with Regeneron antibody cocktail (developed in partnership with Eli Lilly and AbCellera Biologics) which currently has pending patent application and still has not got FDA approval. The antibody therapy is expected to be used in both treatments, but also as preventative drug also called a passive vaccine.
- Siemens Energy (ENR:xetr) - the company recently IPO’ed as a spinoff of Siemens, Europe’s largest industrial conglomerate, and has so far not gained any momentum down 1% from its opening price on first day of trading. However, recently analysts have started covering the shares with buy and outperform recommendations. Out of 12 recommendations, 10 are buys and 2 are holds. Consensus price target is €27.10, around 25% higher than yesterday’s closing price. The key catalysts mentioned by analysts are margin improvement from the current 5.9% EBITDA margin and attractive valuation.
What is going on?
- US President Trump returned from hospital late yesterday. While questions linger about his condition and whether the virus’ impact could decrease his ability to campaign up to Election Day, the quick turnaround will lead many Republicans to claim that lockdown measures and fears of the disease are excessive if a person of Trump’s age and condition can recover so quickly (even if he had access to treatment unlike the average person, to say the least.)
- Asian bond primary market resumes. Asian dollar bond spreads are falling as investors move on after Evergrande scare. Contributing to the recovery is also the risk-on sentiment coming from the US as Trump returns to the White House and a stimulus package looks moving forward. To market bonds today are Baidu and the Export-Import Bank of Thailand.
- The reflation was alive yesterday with yields climbing. Longer term yields rose in the US on more stimulus hope from a potential Democratic clean sweep. Bolstering the reflation trade investors also bid up small-cap stocks and the same patterns were evident in European markets.
What we are watching next?
- US Treasury auctions this week in focus as long US yield spike higher with some suggesting that the rise in yields is due to the shift in favour of a strong Democratic showing (including the taking back of the Senate) as the US election. Regardless, the US 30-year yield benchmark crossed above 1.50% for the first time since June and the US 10-year benchmark rose above 0.75% as the yield curve steepened ahead of a trio of options from the US Treasury starting today with a huge $52 billion auction of 3-year treasuries followed by an auction of 10-year Treasuries tomorrow and 30-year T-bonds on Thursday.
- US stimulus prospects now that Trump back in place to add urgency ahead of election – hard to tell whether the return of Trump to the White House makes a stimulus deal more or less likely, given Democratic outrage over the Republicans’ attempt to ram through a last-minute Supreme Court nomination in the days just before the election, but it is a critical issue for risk sentiment and the US dollar, which could weaken further on a stimulus deal of reasonable size.
- Jerome Powell and Christine Lagarde speak today. Yesterday we had Mester, the president of the Cleveland Fed, saying that she doesn’t see the size of bond buys rising, however the Fed could opt to concentrate bond buying to longer maturities. It will be important to understand whether Powell can give further details on that. In Europe, it will be important to understand whether the ECB sees further stimulus following weaker than expected inflation numbers last week.
- Delta Air Lines Q3 earnings on Friday will impact the entire global tourism and commercial aviation industry as one of the largest carriers will provide insights on the outlook but also current state of airborne mobility both domestically and abroad.
- TRY and RUB on Armenia-Azerbaijan conflict – the geopolitical stakes are high for Russia and Turkey over the hot conflict in the Armenian-majority enclave of Nagorno-Karabakh within Azerbaijan with the two countries supporting opposite sides in the conflict (Turkey supporting Azerbaijan while Russia nominally supports Armenia, although it would prefer that the conflict merely stop). The fresh hostilities have clearly impacted the two currencies and bears watching for further distress.
Economic Calendar Highlights for today (times GMT)
- 0835 – ECB President Lagarde to Speak
- 1230 – Canada Aug. Int’l Merchandise Trade
- 1300 – ECB President Lagarde to Speak
- 1400 – US Aug. JOLTS job openings
- 1440 – US Fed Chair Powell to peak
- 1600 – EIA’s ST Energy Outlook
- 2030 – API’s weekly oil and fuel stock report
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