Market Quick Take - May 7, 2020
Chief Investment Officer
Summary: Yesterday saw another late sell-off on Wall Street, but one that was once again largely erased overnight as sentiment improved again in Asia. Today we look forward to the latest US jobless claims data and a Bank of England meeting as the pound finds itself under pressure in recent sessions.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (Nasdaq 100 Index) – we continue to see performance divergence in the more concentrated Nasdaq-100 Index, which posted a modest new high for the week yesterday before US equities sold off in late trading and then bounced again overnight. The S&P 500, on the other hand, found resistance once again at the key 61.8% retracement area of the prior sell-off near 2890 – the key local pivot.
- USDCNH – not much going on here, but we have seen a bit of Chinese currency weakening over the last week as the USD has firmed and US-China tensions are high, this exchange rate bears watching more than trading as any move threatening 7.20 or higher becomes a game-changer across markets.
- EURJPY and EURUSD – EURJPY continued lower to new cycle lows yesterday well below 115.0 as the euro remains broadly weak on slow burn EU existential concerns. The bigger test for the euro is in EURUSD, where a patch of range support remains down to the most recent pivot low of 1.0727 ahead of the multi-year low at 1.0636.
- GBPUSD – the Bank of England is up later today, with the question looming on whether the Bank will move proactively here with new measures already now or wait for the first signs of how the recovery begins shaping up in June. New BoE Governor Bailey has been critical of the government’s efforts thus far as potentially insufficient and leaving the economy “scarred”. GBPUSD suffered notable weakness from the highs this week – next are of interest to the downside is 1.2250, the most recent pivot low.
- EURNOK – The Norges Bank meets this morning – no expectations there, but any guidance on zero or even negative rates a possible surprise – this meeting comes at an interesting time technically for EURNOK, which is close to support just above 11.00.
- OILUSJUL20 (WTI) and OILUKJUL20 (Brent): A five-day rally was halted yesterday as the EIA reported another rise in crude stocks and big jump in distillates, a sign that the economy is only slowly coming back to normal. Gasoline consumption bounced strongly but remained far below the seasonal average. As the June WTI gets closer to expiry the market will increasingly be focusing on stock levels. The speculative driven rally and return to $25 WTI and $30 Brent carries the risk of becoming self-defeating with prices approaching levels where producers postpone or abandoned plans to reduce production.
What is going on?
Australia registered a record trade surplus in March as a rebound in Chinese demand for commodities boosted exports while imports fell as Covid19 lockdowns reduced demand.
China April Caixin Services PMI registered a weak reading of 44.4. suggesting that China’s services sector contracted further in April.
Brazil cut Selic Rate, its interest rate benchmark by 75 bps to 3.00%, more than consensus expected as Brazil’s economy and currency are under significant pressure. The Brazilian real (BRL) closed more than 2.5% weaker versus the USD at its lowest daily close for the cycle and is down some 30% versus the USD this year.
The EU will offer membership and more aid to the Balkans, as they yesterday offered “unequivocal support” for allowing the five former Yugoslavia countries (Serbia, Kosovo, Montenegro, Albania, Bosnia and North Macedonia) and Albania to become members of the EU and extended offers of more financial support. The move was seen as an attempt to counter influence and good-will moves from Russia and China in the region. The US democracy rights group Freedom House labeled Hungary a “hybrid regime” in a report this week, calling the regime there something between a democracy and authoritarian regime and gave the same label to Montenegro and Serbia.
What we are watching next?
More Q1 earnings Uber Technologies (Today), Booking (Today) and Siemens (Fri).
US Weekly Initial Jobless Claims (today) and US Apr. Nonfarm Payrolls Change and Unemployment Rate (both tomorrow) – the market yesterday shrugged off the -20.2 million in US April ADP payrolls changes and may do the same for Friday’s official Nonfarm payrolls change series and the unemployment rate spiking to perhaps 16%. But the weekly initial jobless claims series becomes more important from here (perhaps starting with next week’s reading more than today’s) as many US states are opening up from shutdowns..
Turkey – the Turkish lira is under major pressure again even as the country’s banking regulator moved late Tuesday to stem foreign speculation in the country’s currency, TRY, with moves that amount to capital controls. The USDTRY rate is up over 3% this month. We don’t put USDTRY on the trading list because speculation is dangerous and a further devaluation is already priced into the forward curve.
US-China relationship – this is a critical additional layer to this crisis, as a further falling out between the world’s two largest economies and renewal of trade tensions or worse will add another level of seriousness to concerns that the recovery will stumble. USDCNH, noted above, is a key market barometer, but new Trump tariffs, etc., would also dent confidence broadly.
Economic Calendar Highlights (times GMT)
- 0600 – UK Bank of England Meeting – note the unusual time relative to the past – consensus expects no major moves until the June meeting, but the Bank could offer strong forward guidance on its intentions or even surprise the market with new easing today.
- 0800 – Norway Norges Bank Announcements – the rate not likely to go to zero or below. Oil probably more important here – but EURNOK near pivotal levels around 11.00.
- 1230 – Czech Central Bank Repurchase Rate – another 50 bps chop to take rate to 0.50% expected
- 1230 – US Weekly Initial Jobless Claims – this week’s number still important, but from next week on the market will be this data series even more closely for signs of how the recovery is shaping up.
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)