Market Quick Take - May 14, 2020

What is our trading focus?

• US500.I (S&P 500 Index) and USNAS100.I (Nasdaq 100 Index) – the late sell-off has taken on a bit more severity with this latest move lower in US equities, as we watch today for further breakdown risk. The next levels for the S&P500 index are the recent pivot low around 2771 and then the 55-day moving average at 2731. For the Nasdaq 100 the corresponding pivot lows are much lower in percentage terms at near 8556 and the 55-day and 200-day moving averages are lower still at 8282 and 8345, respectively.
• USDCAD – today sees the release of the Bank of Canada’s Financial System Review, a major look at the Canadian financial system and risks to it from the economy and of course, the Covid19 crisis. Any hint at major new policy prescriptions could see CAD volatility picking up after many weeks of USDCAD coiling in a shrinking range. Bank of Canada governor Poloz will host a press conference thirty minutes after the release of the review.
• EURUSD and USDCNH – the US dollar is generally pulling higher across the board, but the move will continue to look somewhat muted unless the major EURUSD pair contributes with a move lower, which it is threatening to do once again in eyeing the 1.0800 area for now the third time in the last week and the fifth time since late March. A stronger US dollar could add pressure to wobbly global sentiment and intensify focus on the USDCNH rate, the most important exchange rate for market stability if China’s currency is coming under pressure to fall to more than 7.20 to the dollar.
• EU50.I (Euro STOXX 50 Index) and BNK:xpar (European banks) - focus on European equities today as general market sentiment is and that Peter Huber, a member of the German tribunal, said in the Sueddeutsche Zeiting interview that ECB isn’t “Master of the Universe” increasing the fault line between the German constitutional court and the ECB. European banks were weak yesterday touching lows from 21 April and could turn into a bigger problem for the EU.
• JNK:arcx (US high yield credit ETF) - The Fed started buying US high yield credit ETFs yesterday, but the underlying US credit bond market is actually what we see as crucial information about the weakness developing in credit.

What is going on?

US Fed Chair Powell spoke yesterday against the use of a negative interest rate policy which triggered the first significant slide in the equity market yesterday. Powell leaned on calling for more fiscal activism to address the Covid19 crisis.

Another famed hedge fund managed, billionaire David Tepper, said that US stocks are most overvalued ever save for 1999. David Tepper was a rather famous cheerleader for equities back in the 2010 time frame in promoting what some dubbed “the Tepper trade”, the idea that the only way for the US equity market was up, because if the economy improved, it would be good news for equities, and if it didn’t it would still be good for equities, because the Fed would simply ease more.

Australia’s April jobs report was slightly worse than expected as the country lost nearly 600 thousand jobs in the month. While the unemployment rate only rose to 6.2% and was expected to come in worse, the percentage is misleading due to the governments “JobKeeper” programme which keeps many nominally classified as still employed even if they worked no hours, while receiving a monthly stipend directly from the government.

VIX sees largest 2-day move since 17 March highlighting the fragility of the market and how fast sentiment can change from positive to negative. Watch long volatility instrument for risk gauge.

What we are watching next?

US Weekly Initial Jobless Claims and Continuing Claims are set for release today, one of the few high frequency data series from the US economy to assess the rate of improvement on the ground. While the number has improved every week for the last several weeks, it is still expected around 2.5 million today, around four times the worst reading ever prior to the crisis.

Bank of Canada to release of Financial System Review today – this major look at the Canadian financial system and economy could hint at policy options that the Bank of Canada could take from here that may surprise the market and shock USDCAD out of its tightening range. A press conference is set to follow the release of the review. Incoming BoC governor Macklem is set to take the helm until June 3.

Economic Calendar Highlights (times GMT)

• 1030 – UK BoE Governor Bailey to Speak- GBPUSD broke some local support yesterday and market still getting accustomed to the new Governor.
• 1230 – US Weekly Initial Jobless Claims and Continuing Claims – expected to show another 2.5 million lost jobs and continuing claims above 25 million, staggering figures.
• 1230 – Canada Mar. Manufacturing Sales
• 1400 – Canada Bank of Canada to release Canada Financial System Review – see above, could be important for CAD volatility.
• 1430 – Canada BoC Governor Poloz Press Conference – this is in connection with the financial system review released thirty minutes earlier.
• 1430 – US Weekly Natural Gas Storage
• 1700 – US Fed’s Kashkari (Voter) to Speak at the Economic Club of New York – Kashkari is a voting member of the FOMC and an outspoken dove
• 1800 – Mexico Central Bank Rate Announcement - expected to chop another 50 basis points from the policy rate to take it to 5.50%
• IEA Oil Market Report
• 0200 – China Apr. Industrial Production and Apr. Retail Sales - interesting to see how wide the contrast is between these two areas of the Chinese economy