Market Quick Take - May 7, 2020

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.