Market Quick Take - May 19, 2020
Chief Investment Officer
Summary: Equity markets closed to the cycle highs in the US yesterday after drug company Moderna claimed success in early trials with a Covid19 vaccine before the market open yesterday. In Europe, German Chancellor Merkel and French President Macron announced an agreement in principle on a half-trillion euro recovery deal to be funded by the EU, prompting a euro rally and supported Italian sovereign debt.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – US markets ripped higher yesterday, with much of the action coming before the US open on the announcement of a possible vaccine candidate from Moderna. The S&P had a look at the cycle highs at 2965 yesterday and the 200-day moving average is only slightly higher, just above 3000. The Nasdaq 100 index, meanwhile, managed to trade briefly above the highs for the cycle, posting a high of 9365 yesterday, less then 4.5% from an all-time high.
- EURUSD and EURCHF– a possible watershed moment for the EU response to the Covid19 crisis yesterday came with the announcement of a crisis recovery fund from Merkel and Macron (more below) and the euro responded with a sharp rally against the USD and JPY. EURUSD closed the session yesterday at its highest level in two weeks, with the next focus, if the move can hold at the 1.1000 area highs from the beginning of the month. The EURCHF move above 1.0600 from near 1.0500 was also particularly large given the recent trading range there.
- GBPUSD and EURGBP – sterling consolidated yesterday and rallied against a very weak US dollar but ended the day still near recent lows versus the euro after BoE member Tenreyro clearly indicated that negative policy rates are a policy option for the bank late Monday and said they had been a success in Europe. BoE Chief Economist Haldane also indicated the bank must study how low rates can go.
- MRNA:xnas (Moderna) - shares were up 20% yesterday as biotechnology company announced positive news on its experimental vaccine for COVID-19 with signs of immune-system response. The phase 1 trial consisted of 45 patients, so we encourage investors to not get too excited yet. In the phase 2 trial 600 patients will be part of the experiment and thus being much more difficult to pass -false positives are part of phase 1 trials. The fact that Moderna also announced a public offering of $1.3bn just after the trial data release gives some indication that many of these vaccine companies are taking advantage of every opportunity to increase perception to raise funds either from private investors or get access to public funds.
- XLE:arcx (US energy sector) and EXH1:xetr (European oil & gas sector) - with Brent crude pushing through $35/brl this morning our long thesis on energy companies (oil majors) from last week seems to have got some tailwind. The combination of oil demand from China, oil production cuts and general strong sentiment in equities are lifting both oil prices and energy stocks.
- XAUUSD & XAGUSD – Gold’s climb to a fresh 7-year high has been met with profit taking after US stocks surged on renewed hopes for a coronavirus vaccine. Holdings in gold-backed ETFs meanwhile reached a fresh record of 3075 tons, a year-to-date increase of 500 tons. Support now needs to be found around the recent resistance-turned-support level at $1720/oz. Following Fed’s Powell comments that the coronavirus recovery could stretch through end of 2021 the market will be focusing on his appearance before the Senate Banking Committee today.
- OILUSJUL20 and OILUKJUL20 – WTI and Brent crude oil have both reached one-month highs. Swift and aggressive production cuts from the OPEC+, rising demand, a V-shaped recovery in Chinese oil demand and news about a viable coronavirus vaccine have all supported to current recovery. The recent rally and with that the collapse in time spreads should see storage plays begin to be abandoned thereby adding supply to be the market. The biggest short-term risk however remains the risk of producers beginning to waver on maintaining cuts, especially in the US with forward prices now well above $30/b. Resistance in WTI at $35/b and Brent at $36.3/b.
What is going on?
Germany and France agree on recovery deal of EUR 500 billion, which would be funded from the EU budget (the MFF) and weighted by the capital key (i.e., Germany would fund a significant percentage of the package as the largest EU economy), but with funds directed in the form of grants and weighted to countries most affected by the Covid19 outbreak. The idea must be approved by all 27 EU member states, but it is seen as a significant breakthrough. The Euro rallied sharply, and Italy-Germany 10-year debt spreads fell some 25 basis points.
US President Trump threatened to pull the US out of the WHO permanently if changes were not made to the organization to prevent what the US sees as its pro-China bias.
China moved ahead with tariffs of 80% against imports of Australian barley, a move seen in retaliation for Australia’s questioning of the origins of the coronavirus even if China claimed the move was against Australian dumping of barley hurting its domestic production. The AUD was slightly lower in the crosses, but still managed a strong day yesterday against safe-haven currencies. China is said to be considering move against Australia’s wine and dairy industries.
China has moved to lockdown some 100 million of its population in Northeastern regions of China on a second wave outbreak of Covid19.
What we are watching next?
US Secretary of Treasury Mnuchin and Fed Chair Powell to testify today before a Senate banking committee on the CARES act, as the political scene in the US is heating up ahead of the 2020 election in early November. Discord between the two parties could hamper the further response from the US government as a huge $3 trillion house bill passed by the democratic majority body will not pass the Republican majority Senate or receive President Trump’s signature.
Economic Calendar Highlights (times GMT)
- 0815 – Norway Norges Bank chief Olsen to Speak - with the Norwegian government stepping up big with a large stimulus announcement recently and oil prices on the mend, the Norwegian Central Bank may see little urgency at the moment to send any loud signals.
- 0900 – Germany May ZEW Survey – Germany is at the leading edge of economies trying to open up from Covid19 shutdowns, as we watch for the shape of the recovery from here.
- 1230 – US Apr. Housing Starts and Building Permits – rearview mirror data from what we all know was the month of total shutdown.
- 1400 – US Fed Chair Powell and US Treasury Secretary Mnuchin to testify.
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