Summary: Overnight, the US dollar rally extended and took out a number of key levels across major USD pairs, helping gold punch back down through 1900 dollar/ounce as well. In US equities, the bounce yesterday found resistance at a locally important moving average, while Europe hardly managed anything resembling a bounce. After the US market close, Tesla stumbled badly on a Battery Day disappointment.
What is our trading focus?
- S&P 500 Index (US500.I) & NASDAQ 100 Index (USNAS100.I) – yesterday saw a modest bounce in the broad US equity market (S&P 500), but one that has yet to take back the key resistance areas in the broader market, namely the 3,300 area and the 55-day moving average (currently 3,319) that has come into vogue recently due to multiple interactions. That same moving average was near the top yesterday for the Nasdaq 100 index, although the 61.8% Fibonacci of the recent sell-off – at 11,202, was within a couple of points of yesterday’s highs. US technology stocks were up 2.1%.
- STOXX 50 Index (EU50.I) – European equities continue to be enclosed by negative narratives with the rising COVID-19 cases and new local restriction lower expectations for economic growth. STOXX 50 did bounce back a bit yesterday in an unconvincing matter closing above the previous close but lower than the opening jumping suggesting weak sentiment. This morning the index is higher trying to overcome the psychological level of 3,200.
- Spot Gold (XAUUSD) & Spot Silver (XAGUSD) - remain challenged by renewed dollar strength which stepped up a gear overnight with EURUSD breaking below €1.1700. Cushioning the impact are steadier stocks after Fed Chair Powell said the U.S. economy will likely need further support. The short-term technical outlook has deteriorated and below the August low at $1863/oz, the market will be focusing on $1837/oz, the 38.2% retracement of the March to August rally. Silver continues to get slammed with the XAUXAG ratio rising to 80 with the next levels of support in XAG being $23.45/oz and $22.90/oz. Gold is currently 40 dollars away from relative safety above $1920/oz.
- WTI Crude Oil (OILUSOCT20) & Brent Crude Oil (OILUKNOV20) - both trades nervously within a one-dollar range with the market focusing on dollar strength, an expected rise in supplies from Libya and not least demand uncertainty amid a resurgent coronavirus and lockdowns. Focus today the weekly EIA report with the API last night presenting a mixed picture with rising crude oil stocks and a sizeable drop in both gasoline and distillates. WTI looks vulnerable below $39/b while a break below $41/b in Brent could signal a renewed test of the recent lows around $39.30/b.
- HG Copper (COPPERUSDEC20) - a five-month rally has started to look tired as the dollar strengthens, warehouse monitored stock levels stabilizes and lower domestic prices in China. The current price at $3.0250/lb not far from challenging the trend-line from the March low, today at $2.9850/lb. Copper has been a classic momentum trade with hedge funds and CTA’s buying into the strength seen during the past few months. As a result, the speculative net-long has reached 76,697 lots, highest since June 2018. Breaking the uptrend could trigger fund liquidation that potentially could see it target $2.77/lb, the August consolidation low.
- EURUSD & AUDUSD – the action in the US dollar yesterday saw a breakthrough to the upside for the greenback, with the important 1.1700-50 area in EURUSD fully giving way and AUDUSD trading far under 0.7200.
- USDJPY and JPY crosses – USDJPY can often trade at odds with the broader US dollar picture because the two currencies are often positively correlated in situations in which the market is looking for safe havens. Yesterday and overnight, the price action in USDJPY bounced back over the pivotal 105.00 area and the pair needs to find resistance here ahead of 105.50 or so to suggest that the recent sell-off will stick as a potential new trend to 100.00. Elsewhere, the JPY remains in an uptrend in pairs like AUDJPY and EURJPY across the G10.
- Nike (NKE:xnys) and Adidas (ADS:xetr) - shares were up 3.1% ahead of its quarterly earnings and extended the gains by 13% in after-market trading as FY21 Q1 revenue came in at $10.6bn vs est. $9.1bn expected. Gross margin, a key metric for retailers, was 44.8% vs 42.9% showing improving inventory and better sales mix than estimated. EPS was $0.95 vs $0.86 a year ago. What got investors excited was the indication of potential double-digit revenue growth in the current fiscal year which was almost twice the expected level a month ago. Online revenue was up 82% y/y indicating that the company has successfully moved business online and likely tapping into the home physical exercise movement. The strong Nike results could obviously impact Adidas and other sports athletic stocks in the European session.
- Tesla (TSLA:xnas) - Tesla’s much-hyped battery day was a dud for investors in the company’s stock after Elon Musk merely unveiled plans for producing its own batteries and to reduce their price by half, as well as the intent to produce a $25,000 car within three years. Musk, as well as an “eventual” production target of 20 million vehicles a year (more than twice as many as the current largest producer Volkswagen and versus 367,000 Teslas sold in 2019). Tesla shares traded more than 6% lower in after-hours trading after falling 5% in regular trading.
- Carvana (CVNA:xnys) – The share price rose 30% yesterday on strong projected growth for Q3 and an upgrade from Goldman Sachs. a Carvana sells used cars in large automated “vending machines” in the US via an online platform and has been a Covid-19 era darling rising over 100% from its price at the start of year. The company has yet to report any positive earnings but has featured strong revenue growth in recent years.
- Argentina 0.125% July 2030 (US040114HS26) - The bond falls into distressed territory just after a couple of weeks that its debt was restructured. There is fear that the FX restrictions will have only short-term impact on inflation, but on the long run they could affect business investment and productivity.
What is going on?
- Sterling dipped back lower in a volatile session that first saw the currency surging on BoE Governor Bailey playing down the odds of the BoE moving to cut the policy rate to negative, but then later falling as UK Prime Minister announced new virus measures and implored workers that could to work from home for the next six months and that enforcement measures would be tougher. GBPUSD fell through 1.2750, a notable chart area, and EURGBP bounced back toward 0.9200.
- There are signs of distress in the Emerging Market. Turkey has been downgraded, Argentina 2030 bonds are trading in distressed territory, the Philippines had to pull debt deal from the primary market and Zambia defaults on its own debt. All of this makes us think that there could be more volatility in this space.
What we are watching next?
- US political situation and risk for stimulus Trump’s intention to move ahead with a new Supreme Court nomination in what could be the last days of his presidency and reported Democratic plans to expand the court if he and the Republican led Senate do so are creating a further aggravation of the bitter partisan divide in the US, one that is holding up the next round of stimulus, although a basic spending bill was passed that pushes the risk of a government shutdown until after the presidential election (still a looming risk).
- Euro Zone flash PMI’s for September out this morning – these are important as a measure of the trajectory for the EU economy, where the acceleration of coronavirus cases in recent weeks could be dampening activity.
Economic Calendar Highlights for today (times GMT)
- 0715-0800 – Euro Zone Flash September PMI’s
- 0830 – UK Flash Sep. PMI
- 1345 – US Flash Sep. Markit PMI
- 1400 – US Fed Chair Powell before House Panel on Covid-19
- 1430 – EIA's Weekly Stock Report
- 1500 – US Fed’s Evans (Non-voter) to Speak on Economy and Monetary Policy
- 1700 – US Fed’s Kashkari (Voter) to Speak
- 2245 – New Zealand Aug. Trade Balance
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