Head of FX Strategy
Summary: The US equity markets sold off for a third day in a row yesterday, although a rally later in the session saw stocks closing well off the lows. A cloud continues to hang over US stimulus prospects as Trump is at odds with his own party in the Senate and with the House Democrats. Elsewhere, the grain complex is grabbing headlines as Corn traded above $4 per bushel in the US and Wheat there hit a five year high on global supply concerns.
What isour trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)- US equities stumbled badly in early trading yesterday, but managed to pick up later in the day before sentiment wobbled overnight again – possibly on the continued clouded prospects for US stimulus (See below).The Nasdaq 100 found support at its 21-day moving average at 11,737, still above the bigger support of the11,600 area and the 55-day moving average near 11,420. The technical focus for theS&P 500index s perhaps the rising channel support and the 3,410 Fibo retracement area (38.2% of rally from September lows), with the 55-day moving average there down at 3,380 and rising fast.
AUDUSD – the Aussie stumbled badly yesterday after Reserve Bank of Australia Governor Lowe made it clear that the central bank is considering purchasing longer dated government bonds beyond five years andthis has the market smelling a shift to a proper QE programme at the early November RBA meeting. AUDUSD will focus on the major 0.7000 level if the sell-off continues, likely with some correlation to the direction in risk sentiment. A break of that level would point to the 200-day moving average below 0.6800.
EURUSD is critical for the broader USD view andwas also weak yesterday, testing below 1.1700 for the first time in nearly two weeks, likely on ongoing doubts about whether US fiscal stimulus will be forthcoming and generally wobbly risk sentiment. But the bigger trigger level lower is the range low since late July just ahead of 1.1600. EURUSD speculative long positioning in the US is still at very extended levels, suggesting risk of capitulation toward the huge 1.1500 area if support is broken.
Zoom Video Communications (ZM:xnas) - the stock rose more than 5% yesterday after an investment day event in which the company unveiled new products, like a new events platform and security and other enhancements to existing products. The stock is up 500% from the March lows during the initial phase of the Covid-19 pandemic.
US Corn (CORNDEC20) and Wheat (WHEATDEC20) - Chicago Corn traded up above the significant $4 per bushel mark and Chicago Wheat rose above $6 per bushel for the first time in five years yesterday. The corn price followed the lead of corn futures in China, where the crop has been impacted by widespread flooding and fresh news of cuts to Argentina’s wheat crop outlook drove wheat prices higher as supply concerns for wheat have gone global on dryness in many growing areas.
Italian 10-year government bonds (10YBTPDEC20) fell amid a surge of Covid-19 cases. Italian BTPS fell sharply during the trading day of yesterday as Covid-19 cases are surging and the government imposes new restrictions. Yields in the long part of the yield curve with maturities 15-year plus have risen equally by 5bps. Today the Bank of Italy releases the quarterly economic bulletin, if data are better than expected we might see a reversal. The 10-year BTP closed at 69bps.
The French and German government bonds' (10YOATDEC20 and BUNDDEC20) yield spread tightened as investors seek shelter amid a second wave of the pandemic. As coronavirus cases surge globally, we can expect investors to flee to safe havens. Crucial will be next week’s ECB President Lagarde’s speeches in order to understand what the central bank is looking to do in order to aid the market.
What is going on?
Morgan Stanley the first US bank to actually post gain after reporting earnings – the bank reported a huge 35% jump in revenue from fixed income trading and a more than doubling in equity-underwriting fees. The bank has been the best performer among large US banks as its shares are down a mere fraction of a percent from the start of the year, as it is little exposed to the consumer side of the banking that has been so heavily impacted by the Covid-19 outbreak. The worst performer among the major banks is Wells Fargo, with its heavy Main Street exposure, down over 50% since the start of the year.
Still no breakthrough in Brexit talks as EU Summit underway and set to end today - UK Prime minister Boris Johnson had already indicated that he would not pull out of talks yesterday, but between the lines in some coverage of the EU Summit, there is a risk of a stand-off if no progress is made soon, with France still sticking to its positions on fisheries while German Chancellor Merkel and EU chief negotiator Barnier made friendly signs on speeding up talks and willingness to compromise. Two- week put or call options in EURGBP are a way to trade for outcomes for traders experienced in trading options.
US Weekly Initial Jobless Claims rose to their highest level in 7 weeks at 898k - the supposed good news is that the weekly continuing claims data dropped by more than a million to 10M, but some portion of this decline is due to workers running out of benefits. Some 2.8 million Americans are accessing extended benefits from the federal government in a programme that was set up in response to the Covid-19 outbreak in the spring. That programme will end on December 31 if not extended by new US stimulus measures.
Covid-19 news:UK will not allow private gatherings with members of another household in London to slow the spread of Covid-19 and France reported a record 30k+ cases of Covid-19 in the last 24 hours as it moves to require a curfew on the greater Paris metro area and several other major cities. Italy’s Conte is said to also be considering curfew measures.The US registered its largest daily total of casessince July and Germany set new records for Covid-19 cases the last two days running. The WHO aid that remdesivirdrug from Gilead Sciences (GILD:xnas) had little effect on Covid-19 patients.
What we are watching next?
US pre-election stimulus prospects remain very clouded at best.The latest is that US President Trump is willing to go with an even larger package than the prior offer of $1.8 billion that the Democrats rejected (more for content in the package than the overall size) while now Senate Republicans are pushing back more aggressively on the size of the stimulus, with Senate Republican leader McConnell claiming he is only willing to agree to a $500 billion deal.
US Q3 earnings season continues and picks up further next week. Next week features market cap heavyweights like Tesla, Intel, Amazon, and Netflix.
Economic Calendar Highlights for today (times GMT)
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2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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