Market Quick Take - June 9, 2020

What is our trading focus?

• US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – U.S. equity futures posted another strong session yesterday after Friday’s significant gains and the headlines tout that yesterday’s S&P 500 close took the index to a positive year-to-date performance. The tone turned a bit more cautious overnight in Asian hours. Equities will be very sensitive to the Fed’s message at tomorrow’s FOMC meeting as we discuss below – with perhaps asymmetric downside risk for the short term if the Fed under-delivers on market hopes for further support, whether via yield-curve-control or other policy guidance.
  
  
• XAUUSD (Spot gold) - has recovered back to $1700/oz following Friday’s better-than-expected US payroll slump. Softer bond yields and a stronger yen has emerged ahead of Wednesday’s FOMC meeting. The market will be watching closely any mentioning of yield-curve-control, something that could trigger the next move higher for gold given the potential for sending real yields lower once inflation begin to recover. The current lack of gold appetite was highlighted in the weekly COT report which saw the fund long drop to a one-year low. Silver received a boost in Asia after managing to hold steady against gold during Friday’s sell-off.
  
  
• CORNJUL20 (CBOT Corn) - a potential recovery candidate with funds holding a seasonally record net short. This despite seeing the price trade higher since late April as ethanol demand which account for one-third of US corn has recovered with the rising oil price. Wednesday’s monthly WASDE report from the US government will draw attention for what it might say about corn use in ethanol.
  
  
• HTZ:xnys (Hertz) - shares are up 609% in three sessions pushing the price significantly above the price just before the car rental company filed for bankruptcy. The move is not only driven by retail investors as large blocks of shares were traded yesterday. With signs of commercial airline traffic coming to live traders and investors are speculating that there’s more value in Hertz.
  
  
• CHK:xnys (Chesapeake Energy) - as with Hertz shares there is wild speculation in Chesapeake shares up 429% in three sessions as economic has improved and bolstered sentiment in energy markets. The company is still potentially filing for bankruptcy in a deal that would give lenders control.
  
  
• STPU:xmil (US Yield Curve Steepening 2-10) - the steeper yield curve into last Friday’s close is a critical development for risk assets as it has taken real yields (the yield on longer dated US treasuries versus inflation) sharply higher, even as it is a side effect of a rosier outlook for the economic recovery. Since the start of this week, however, longer US treasury yields have backed down from the big move last week, likely as treasury traders are concerned about the message from the Fed at tomorrow’s FOMC meeting, as any lack of clear intent to shift to an eventual yield-curve-control could see steepening set to continue. (alternatively, the yield curve could flatten if the markets feel that the Fed has grown uncomfortable with the markets’ current speculative frenzy).
  
  
• USDJPY – the Japanese yen has suddenly come alive and has blasted stronger to start this week, as the market has second guessed some of the recent developments in US long treasury yields, or at minimum as US longer yields have backed down sharply from their surge into Friday’s close. The USDJPY and the outlook for JPY crosses will be the most sensitive to the broader markets (both US treasuries, but also risk assets more broadly) and if USDJPY moves and remains below 108.00, the bearish reversal here will continue to set the focus lower.
  
  
• AUDUSD – the 0.7000 area looks a critical chart point for this risk-sensitive FX pair around this week’s chief event risk, the FOMC meeting tomorrow – with the overnight high of 0.7040 just a few pips higher than the highs at the very beginning of the year. Any “buy the fact” reaction for the US dollar to the FOMC tomorrow, or any consolidation in risk assets could read to sharp consolidation lower in AUD.
  
  
• COPPERUSJUL20 (HG Copper) - has broken through key resistance at $2.50/lb and with hedge funds only just turning net-long, the current momentum and rebuilding of longs may see it challenge $2.62/lb resistance soon. The virus’ impact on tightening supply, especially from key South American supplies, could be seen in China’s lower copper imports last month. Top producer Chile is increasing its supervision of mines to ensure they are complying with Covid-19 safety measures.

What is going on?

• BP is set to cut 10,000 jobs globally after the Covid19 pandemic hit demand for oil – this move suggests that company may not see the V-shaped recovery that the market seems to increasingly be pricing. Most of the redundancies will be for office positions.
  
  
• The Fed increased its support for SME’s late yesterday as it outlined new terms for its Main Street Lending Program facility as it halved the minimum loan size to $250k, increased the maximum size, extended the term of the loans and extended the principal payments to two years from one, among other measures

What we are watching next?

• FOMC meeting tomorrow and how ready and the Fed is to implement yield-curve control (YCC) - this is an important next step for risk assets, the US dollar (and significantly the JPY as discussed above for USDJPY) as any implementation, for example, of yield caps at the longer end of the US yield curve could continue to steepen. Any hesitancy from the Fed tomorrow, on the other hand, could mean that risky assets have over-short their potential for now and see a steep correction in risk assets in the near term and a back-up in the US dollar.
  
  
• The WHO warns of ‘worsening’ virus situation worldwide – “Although the situation in Europe is improving, globally it is worsening” was the grim warning yesterday from WHO’s chief, also warning about complacency. It highlights the fact that the pandemic is far from over with a record 135,000 new cases being reported on Sunday. Almost 75% of the most recent cases came from 10 countries – mostly in Americas and South Asia.

Economic Calendar Highlights (times GMT)

• 0800 – Norway May Region Survey
• 1000 – US May NFIB Small Business Optimism
• 0030 – Australia Jun. Westpac Consumer Confidence
• 0130 – China May CPI / PPI