Market Quick Take - May 27, 2020

What is our trading focus?

• US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – The S&P 500 closed the session yesterday below the 3000 level and the 200 day moving average just below that level after trading well above yesterday, possibly on late session news that the US would seek potential sanctions on Chinese officials and entities involved in enforcing the proposed new security law in Hong Kong (more below). The Nasdaq 100 close almost unchanged from Friday's close after a strong run-up intraday, creating a bearish shooting star candlestick – although overnight action saw what seems an inevitable bounce of as much as 90 points (1%).
• OILUSJUL20 (WTI crude) and OILUKJUKL20 (Brent crude) - momentum seems to be intact with Brent crude above $36/brl this morning, but news about Russia may ease its supply cut could halt the rise. Also, data suggest that the US season for peak fuel demand has started on a weak note as many US states have still not returned to normal traffic activity. Brent is currently boxed in between $37.30/b, the 38.2% retracement of the January to April sell-off and trendline support at $35/b. With US inventories expected to fall again the bullish momentum is likely to be maintained above the mentioned support level.
• German 10-year bunds – a major move yesterday in German Bunds, with the June contract down some 90 ticks on the day as the yield close at a 1-month high above –45 basis points. The German yield curve bear-steepened as the market perhaps looks at the scale of the fiscal response needed to ease the impact of the crisis in Germany and across Europe, with Germany seen on the hook for a disproportionate percentage of the EU recovery package.
• KBWB:xnas (US banks) and BNK:xpar (European banks) - US banks were up 8.6% yesterday in one of its best days and European banks were up 5%. This is a healthy sign as banks have been lagging this entire rally. The drivers were positive sell-side reports on the industry’s money business which seems to be booming, JPM CEO Jamie Dimon’s comments that the US economy could see a faster recovery than currently priced in and then general optimism over countries opening up across many countries.
• AUDUSD – AUDUSD executed a precise test of the major 0.6670 resistance area – near a prior major low and now the 200-day moving average as the USD has traded weaker recently. Background: The Aussie continues to be driven by strong risk sentiment and the re-opening narrative but we remain on high alert given the war of words extending between not just the US/China but also China and Australia on exchanges over the origins of the Covid19 virus. Balancing the ideological and national security allegiance with the US and the trade relationship with China leaves Australia in a difficult position. China accounts for more than 30% of goods and services exports and a more serious reduction in Chinese demand like a consumer boycott of Australian goods and services exports (education/tourism), targeting iron ore, or coal exports would pose a far greater and more damaging impact.
• USDCNH – USDCNY (the mainland USD/yuan exchange rate) is our barometer of China’s intent and proxy for the state of US/Sino relations. Both it and the offshore (CNH) yuan have continued to weaken in today’s session and are pushing to new local highs, within 0.3% of the all-time high of 7.189 in the case of USDCNY, while 7.20 is the focus for USDCNH traders. The PBOC has previously stated that the Yuan is not a one-way bet and do not want a disorderly panicked move. For now, a slow and steady depreciation is in play, rather notable given the USD weakness recently. if the USDCNY exchange rate approaches 7.20, angst will be on the rise but the manner of the depreciation will determine the resultant risk asset response. The more disorderly, the greater the fallout.

What is going on?

US responds to new Chinese security law in Hong Kong - President Trump’s comments were vague but suggested a “powerful” rebuttal would arrive by the weekend. US Senator Rubio confirms in tweets that the sanctions will be going ahead if China passes the Hong Kong bill.

Japan set to unveil a further $1 trillion in stimulus. The new stimulus package, which includes loan guarantees, support for local economies, and rent subsidies, would take Japan’s deficit to worse than 20% of GDP for this year, a record.

Twitter labels Trump’s tweets for fact checking which is the first time and means that Twitter has crossed the Rubicon and indirectly defined itself as media company. This could have wider implications for Trump’s election campaign as Twitter is his go-to channel but also implications for Facebook that has repeatedly resisted the media label as the company knows it comes with higher operating costs.

Chicago Fed National Activity Index plunged to -16.7 in April beating the previous record of –3.4 in January 2009 during the low point of the financial crisis. The index at zero means trend growth and minus values indicate negative deviation from trend growth. The massive plunge was obviously expected so the coming months will be the key test in terms of how the economy rebounds.

What we are watching next?

Equity market technical resolution. Yesterday’s US stock market action and the S&P 500 trading around pivotal chart levels keeps the suspense high on the resolution of the technical setups and the near-term market direction.

Hong Kong and USDCNY: Large protests are expected today in Hong Kong in reaction to China’s proposed security laws and a Hong Kong Legislative Council bill proposing criminalising disrespect of China’s national anthem. China’s National Party Congress may vote to pass the security law bill as soon as tomorrow. USDCNY was trading at 7.158 this morning, less than 0.3% from its highest level in 2019 (which was the high since 2008) of 7.179.

Economic Calendar Highlights (times GMT)

• 1800 – US Fed Beige Book – the various regional Fed comments on the state of the economy in their districts.
• 0000 – Australia RBA Governor Lowe before a parliamentary committee – policy signals could impact AUD crosses and as noted above, AUDUSD is facing down a major resistance level.