Market Quick Take - May 25, 2020

What is our trading focus?

• US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – US equities have erased the weakness from Thursday and Friday last week pushing towards the local highs for the rally that started back in March. For the S&P 500 the 200-day moving average is only 1% away just below the 3,000 level and will be a critical technical inflection point. In NASDAQ 100 the 9,500 is the important level today and if cleared then a new all-time high is in sight. Given how strong sentiment is given the backdrop of negative news on the US-China relationship we believe it’s quite likely that NASDAQ 100 can go to new all-time highs.
• OILUSJUL20 (WTI crude) and OIL:xpar (European oil & gas) - Following a four-week rally WTI crude oil has temporary been boxed in between resistance at $35.20/bbl, the April high and support at $30.75/bbl, the uptrend from the lows. The eventual break will give us a clue about the current strength of sentiment in the market. Seven weeks of buying has resulted in bullish WTI bets rising to 348k lots, a 20-month. While not yet overly stretched, the amount of buying has left the market exposed should the technical and/or fundamental outlook turn less friendly. Buying interest in Brent has been much more muted.
• XAUUSD (Spot gold) trades lower as optimism around global economies reopening boosted global stocks in early Monday trading. This despite the risk of rising geopolitical tensions between US and China. While longer-term focused gold investors continue to flock to bullion-backed ETFs, hedge funds remain much for cautious. In the week to May 19 when the price hit a fresh multi-year high, they only increased their net-long by a small amount keeping the net close to an 11-month low.
• EURUSD continues to be key for overall USD strength and the cross is extending the decline that started mid last week to the lowest levels in more than a week. EURUSD has now firmly established its critical trading range of 1.08-1.10 and any break of this range is likely significant for price action across markets.
• USDCNH is trading close to the March highs as China fixed the CNY weaker overnight sending a signal to the world that China needs a cheaper relative currency to support the export-driven part of the economy.

What is going on?

US-China relationship continues to worsen over the weekend. Markets have typically traded on the hope that the rhetoric is worse than reality when it comes to the US/China disentanglement. Now it seems that each day brings fresh evidence that the relationship has permanently changed and the global geopolitical architectures, which have long been fraying, are moving closer to breaking point. The ideological differences and political fragmentations that drove the original US/SINO confrontations are on full display and the tectonic shifts like, the East/West divide, Splinternet, and supply chain relocations we talked about when trade tensions first emerged are now coming to fruition. Beijing revealed plans on Friday to impose laws on Hong Kong that would ban subversion, secession, foreign interference and any acts that threaten national security. With China’s strike on Hong Kong comes the ultimate test of whether this US administration’s hawkish position on China “bark” is worse than the “bite”. Particularly as the tough stance on China plays into the election strategy and diverts attention from the handling of the health crisis, whilst shifting blame to China.

What we are watching next?

As the world slowly emerges from coronavirus lockdowns the energy markets will be watching annual meetings from big oil companies. Total SA, BP Plc, Exxon Mobil Corp and Chevron Corp are among those holding meetings and the market will be looking for their views on how the lockdowns have impacted their current and future plans.

Economic Calendar Highlights (times GMT)

• 0730 – Sweden unemployment rate (May)
• 0800 – IFO survey (May)
• 1300 – CPB Global Trade Monitor
• 1700 – ECB Villeroy speech