Market Quick Take - May 28, 2020
Chief Investment Officer
Summary: A wild day for the US equity market yesterday as a steep and rather large sell-off yesterday was quickly corralled and entirely reversed into the close of trading, taking the S&P 500 back above its 200-day moving average. A bit of consolidation has settled in overnight as we ponder the EU recovery package as EURUSD trades at 1.1000 and US-China tensions as the yuan is perched at cycle lows.
Heads up: Live Interactive Presentation later today with the team. Tune into our live presentation later today as the Saxo strategy team discusses how to control and reduce risk in these volatile markets.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – The S&P 500 has now closed above the 3000 level yesterday after a zany day of up and down gyrations, while the more concentrated Nasdaq 100 index has yet to close as high as it did last Wednesday, a divergence that is a bit unsettling as the former leaders are now somewhat lagging. Levels to watch include yesterday’s low of 9180 in the Nasdaq 100 and where the S&P 500 closes the week through tomorrow relative to the latest 3000 line in the sand.
- OILUSJUL20 (WTI crude) and OILUKJUKL20 (Brent crude) - trading lower after finding resistance ahead of $37.30/b, the 38.2% retracement of the January to April sell-off. The weakness was started by comments from Russia, that I may ease its supply cut from July. Later in the day the selling extended when the American Petroleum Insititute said that US crude stocks rose 8.7 million barrels last week. The weekly stock report from the Energy Information Administration today at 15:00 GMT is surveyed to show a 1.3 million-barrel drop. Having broken the steep uptrend from the April low the market may now consolidate with focus on support on the July contract at $32.25/b followed by $29/b.
- EURUSD – EURUSD has taken a look above the key 1.1000 level after the EU announced the intent to launch a large recovery package and a vastly expanded budget for the next seven-year budget. But announcing this is only a first step and now comes the hard part – the individual EU nations approving the budget and the taxation that will come with it to fund it. Market confidence in the Euro is likely linked to the success or failure of the EU’s gambit here.
- AUDUSD – AUDUSD continues to look pivotal after trying the critical resistance area near 0.6670 in recent days, with a brief probe above rejected yesterday. The next few sessions look critical for establishing whether the remarkable comeback in riskier, pro-cyclical currencies can maintain a head of steam here in the near term. Another key to watch for AUD is how the currency deals with any more significant volatility in China’s currency – particularly to the downside.
- USDCNH – the US-China tensions remain highs as we discuss below, and China allowed the USDCNY rate to drift to the highs for the cycle near 7.1800. New highs in USDCNY (and the USDCNH – the USD versus the “offshore” yuan) need not trigger unease if the price action is sluggish as the market may see this as China merely probing the US on the issue, but the exchange rate bears close watching, especially if volatility picks up.
What is going on?
US Secretary of State Pompeo says Hong Kong no longer autonomous - Pompeo stated that “No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground.” which suggests that Hong Kong’s special trading status with the US could come under fire here.
EU announces a EUR 750 billion recovery package and vastly expanded 7-year budget. The new package, including €500 billion on “grants” that would be funded by mutual EU debt instruments, and €250 billion in loans, was announced by EU Commission president Ursula Van der Leyen yesterday. As well, she proposed a vastly expanded 7-year EU budget of some €1.1 trillion.
What we are watching next?
US-China developments and USDCNY market developments: The USDCNY rate managed to scrape all the way to test the 9.1800 area highs in USDCNY yesterday and bears close watching as we discuss above for USDCNH, the offshore yuan tradable off China’s mainland. Any moves by US officials against the US-Hong Kong trading status or other sanctions would be an escalation of this brewing showdown and the two ultimate signs that the situation is escalating further would be either side rejecting the US-China trade deal from January or a significant move lower in the CNY independent of the USD strength or weakness elsewhere.
Economic Calendar Highlights (times GMT)
- 1230 – US Apr. Durable Goods Orders
- 1230 – US Weekly Initial Jobless Claims and Continued Claims – expected at 2.1M / 25.7M. With more and more areas of the US opening up from Covid19 shutdowns, this high frequency indicators needs to fall rapidly to indicate any strength in the recovery.
- 1430 - US Weekly Natural Gas Storage
- 1430 – US Weekly DoE Crude Oil and Product Inventories
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