Market Quick Take - August 13, 2020
Head of Commodity Strategy
Summary: Equities stormed back higher yesterday, wiping away the wobble of the previous day that was likely inspired by the sharp backup in long US yields earlier this week. A solid US 10-year auction helped yields ease slightly lower. In Europe, the DAX managed a close back above the pivotal 13,000 level, even as EURUSD rebounded to 1.1800
What is our trading focus?
- S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – US equities rebounded sharply yesterday, wiping away the previous day’s sharp declines and then some, deciding perhaps that the back-up in long US yields is so far insufficient to derail this bull market. While the tech-heavy Nasdaq 100 saw a larger bounce in percentage terms, it still closed shy of the recent highs, while the S&P 500 managed to stick a new high close for the cycle, one that took it just a few points from its all-time high close of 3386.15 (for the cash index).
- German DAX Index (DAX.I) - the DAX managed to stick a close above the 13,000 level yesterday, a pivotal one stretching back to early June. Yesterday’s daily close also took the index above its 200-day moving average after a brief break above that average in mid-June was rejected. DAX traders should keep an eye on the euro as well, as the EURUSD has bounced back to 1.1800 and a new charge to 1.2000 and beyond, if it materializes, could act as a headwind for European equities.
- Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - both continue to recover from their Monday sell-off with gold trading above $1900 while silver so far has retraced 38.2% of the recent slump. During the short and sharp correction both metals retraced half the June to August rally, and in the process the market is no longer oversold and overstretched. We will be watching ETF flows over the coming days to see, as we believe, that the correction will be met with fresh buying interest. Gold will face resistance at 1950 while in silver the levels are $26.30 and $27.50.
- Brent Crude Oil (OILUKOCT20) and WTI Crude Oil (OILUSSEP20) - remain unable to find a break as they both remain rangebound, albeit near five-month highs. US crude stocks shrank for a third week while OPEC in its Monthly Oil Market Report said that US production may avoid the slump previously expected. In it they also lowered their demand forecast for 2020 siting concerns about the ongoing pandemic and its impact on fuel consumption. Later today the IEA will publish its Oil Market Report for August. WTI crude oil remains stuck in a narrowing range between the 200-day MA at $42.75 above and the 50-day MA below at $40.
- AUDNZD – NZD is in focus within the G-10 as the country went from boasting of the only notable country able to boast of a 100 days of no new COVID-19 cases to one that has put its largest city Auckland on lockdown after a cluster of cases has arisen in recent days. The AUDNZD pair is the one of the most interesting here as it has cleared a major resistance line around 1.0865, with the next level of note not until 1.1200-1.1300.
- EURUSD - EURUSD is the key indicator here for an overall direction on the US dollar as the pair rebounded above 1.1800 yesterday and higher still in today’s trade. The high close for the cycle is 1.1877, with 1.1900 a clear chart resistance point after three recent probes of that level that weren’t sustained. A weak USD would help the reflation/strong risk appetite narrative and vice-versa.
- Lyft (LYFT:xnas) - reported Q2 earnings after the close showing revenue at $339mn vs est. $335mn and an adjusted net income of $266mn vs est. $301mn. Active riders in the quarter were 8.69mn vs est. 10.5mn. Q2 revenue was down 61% y/y and is not expected to reach a new high until Q3 2021 according to analyst estimates. Free cash flow in Q2 was $-774mn. Shares were unchanged in extended trading.
- Cisco (CSCO:xnas) - not all US technology is created equal as Cisco is not part of the high growth segment and announced yesterday a disappointing outlook for its FY21 Q1 expecting revenue to be down 9-11% vs est. -7.2%. FY20 Q4 earnings and revenue were better than expected but investors were clearly worried about the expected spending patterns of the corporate sector on networking equipment. Shares were down 6.5% in extended trading.
- Carlsberg (CARLb:xcse) - 1H revenue out DKK 28.8bn vs est. DKK 29.2bn and EBITDA was DKK 6.8bn vs est. DKK 7.1bn. The Danish beverage company sees organic operating income down 10-15% in 2020 and states that it does not intend to do buybacks in the second half.
What is going on?
- The WASDE report for August triggered higher prices in all three major crops. Not least corn where a record yield was overshadowed by optimism for demand. Wheat rose despite the USDA raising outlook for world wheat yet again, largely due to falling consumption from stay-at-home consumers not visiting restaurants. Soybeans yields and production both came in on the high side, but the impact was limited after the USDA raised outlook for Chinese soybeans imports.
- Airbnb revenue was down at least 67% in Q2 falling to $335mn according to documents ahead of the planned IPO later this month. According to the same documents Q1 revenue was $842mn, so Airbnb’s business has been hit hard by the global pandemic. Q2 EBITDA was around $400mn indicating that the company was profitable before COVID-19.
- US core July CPI rose 0.6% MoM and 1.6% year-on-year - the narrative around the surprising advance in prices isn’t entirely consistent, but many categories that rebounded sharply are linked to stay-at-home consumption patterns due to COVID-19 lockdowns. Given where energy prices are relative to a year ago (gasoline prices down around 20%) it is interesting that the headline inflation year-on-year is 1.0% - this bears close watching in coming months as the initial supply-demand disruptions of the crisis phase of the COVID-19 outbreak fade.
What we are watching next?
- US long yields - the recent break-up in yields in the US at the long end of the yield curve at the start of this week was clearly linked with considerable volatility across asset markets, most notably in gold and silver, but tech stock also showed some sensitivity to this development. The energy of the move cooled considerably yesterday, but any sustained rise in yields at the long end of the curve could prove highly destructive of the recent market narrative supporting every higher equity prices. Yesterday’s US 10-year auction went reasonably well and today sees an auction of $26 billion in the US’ longest 30-year bond.
- US weekly Initial jobless claims and continuing claims - the bigger than expected drop last week in both of these high frequency indicators on the state of the US jobs market is encouraging for the shape of the recovery, but we are still looking at weekly figures that are well above the most extreme historical levels in this data series. For example, today’s initial claims expected to drop by 86k to 1.1M, versus a pre-COVID-19 record of 665k.
Economic Calendar Highlights for today (times GMT)
- 1230 – US Weekly Initial Jobless Claims and Continuing Claims
- 1430 – US Weekly Natural Gas Storage
- 1700 – US 30-year T-Bond Auction
- 1800 – Mexico Central Bank Overnight Rate
- 1900 – US Fed’s Brainard (Voter) to Speak
- 2330 – Australia RBA Governor Lowe to Appear before Parliamentary Committee
- 0200 – China Jul. Retail Sales and Jul. Industrial Production
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