Market Quick Take - May 13, 2020

What is our trading focus?

• US500.I (S&P 500 Index) and USNAS100.I (Nasdaq 100 Index) – the technical outlook for the US equity markets turned more negative with yesterday’s slide as the S&P 500 held its resistance line over the last week. The tech-heavy Nasdaq 100 saw an “engulfing” candlestick yesterday in which the day’s open was the highest for the cycle, while the close was below the prior two days’ trading range.
• 10YUSTNOTEJUN20 (US 10Y futures) – US treasury yields dropped yesterday as the record $32 billion US 10-year auction saw the strongest bid-cover demand in well over two years, suggesting strong safe haven demand for US treasuries and driving the US 10-year benchmark yield back a few basis points lower and into the recent range. Today sees a record auction of 30-year T-bonds from the US treasury.
• NZDUSD and AUDNZD – the RBNZ meeting overnight saw the central bank surprising with a doubling of its QE programme as it also flagged the possibility of taking the policy rate into negative territory if it felt the move was necessary, taking the market by surprise and driving a strong sell-off in the NZD across the board. There could be more distance for this currency to travel to the downside to absorb the news, particularly if general risk sentiment comes under pressure again.
• EURNOK – yesterday saw the Norwegian government announcing an enormous stimulus package, much of it to be funded by sales of assets from its petroleum fund rather than through debt issuance. This will mean large scale purchases of NOK to bring stimulus to the economy – see more here. Yesterday, EURNOK broke key support around 11.05 and traded as low as 10.96 on the news.
• OILUSJUL20 (WTI) and OILUKJUL20 (Brent) – WTI crude oil narrowed its discount to Brent yesterday after the EIA in their ‘Short Term Energy Outlook’ - as expected - lowered its production forecast for the year. Further support was provided by an American Petroleum Institute report saying that stocks at Cushing, the WTI delivery hub, fell last week. If confirmed by the EIA in their weekly report today at 14:30 GMT it would be the first drop since late February. Despite the additional cuts from GCC producers earlier in the week, Brent have problems breaking above $30/b, trading near the weakest level in a week. Around noon CET today OPEC will publish its ‘Oil Market Report’ with focus on world oil demand developments. Some forecasters saying it could take a year before demand returns to pre-virus levels.
• WHEATJUL20 (CBOT Wheat) - traded lower after the USDA in their monthly World Agriculture Supply and Demand Estimates report (WASDE) predicted that global supplies would rise to a record. A rebound in crop production in Russia and Australia would lift stocks to 310 million tons, thereby making it harder for US farmers to compete in world markets. The uptrend from May 2019 at $5.05/bu in focus with a break initially targeting the March low at $4.9/bu.
• COFFEENYJUL20 & SUGARNYJUL20 – both under pressure from a Brazilian real in free-fall. The currency has weakened by almost 50% this year with President Bolsonaro’s mishandling of the coronavirus outbreak putting the economy and his political future at risk.  The harvesting of Arabica coffee beans is expected to pick-up speed from next week with some initial worries about lack of farmhands not being a major issue so far. Trend-line support on Arabica coffee at $1.04/lb. Sugar also under pressure due a massive jump in sugar production according to Unica via Reuters. The industry group said the plunge in ethanol demand had triggered a 93% jump in sugar production during the second half of April. 

What is going on?

The US Federal programme to begin purchasing Bond ETFs started yesterday, with the major LQD bond ETF of investment grade debt jumping well over a percent at the open before closing some 0.3% off the highs.

Investment legend Stanley Druckenmiller was out with a very negative outlook in a talk before the Economic Club of New York in which he cast heavy doubt on the potential for a V-shaped recovery and said that the equity market was poorly priced for risk/reward, though he liked the potential for long/short plays in the market.

What we are watching next?

US Fed Chair Powell is set to speak today in a webinar hosted by the Peterson Institute for International Economics, discussing “Current Economic Issues” and there will be a question and answer session. This could see the market highly reactive to any surprise comments from the Fed Chair.

Economic Calendar Highlights (times GMT)

• 0600 – UK Mar. Visible Trade Balance – Is UK heading back to running large deficits? Currency risk if so.
• 1300 – US Fed Chair Powell to Speak – see above.
• 1430 – US DoE Weekly Crude Oil and Product Inventories
• 2301 – UK Apr. RICS House Price Balance – house sales had surged after the Brexit clarity but are now impacted by the Covid19 crisis, with market expecting a deeply negative reading.
• 0130 – Australia Apr. Employment Change / Unemployment Rate – a large jump expected in unemployment, even as the government has moved mountains to keep many workers stilly nominally classified as employed.