Market Quick Take - May 25, 2020
Chief Investment Officer
Summary: Asia equities are broadly higher and sweeping aside the mounting tensions between the US and China, instead focusing on the perceived positives which have driven risk assets in recent weeks. Namely reopening economies, slowing COVID-19 case growth and expanding central bank balance sheets. Trading may be light this Monday with holidays in U.S., U.K. and Singapore.
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
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)