Market Quick Take - October 2, 2020
Head of FX Strategy
Summary: The US equity market tried to hold on to its recent gains despite the lack of progress on US stimulus talks, but the futures stumbled badly this morning on the news that US President Trump and his wife both tested positive for Covid-19 after traveling with an aide that later tested positive. The US dollar firmed slightly overnight and then further on the Trump news.
What is our trading focus?
- S&P 500 Index (US500.I) & NASDAQ 100 Index (USNAS100.I) – US equities traded to new highs yesterday despite lack of progress on US stimulus (more on that below) and Trump’s quarantining, with local resistance above 11,500 taken out in the Nasdaq-100, leaving only the 11,750 area 61.8% Fibo as the last major resistance ahead of the all-time highs. Early morning here in Europe news has broken that Trump has also tested positive for Covid-19 immediately taking down US equity futures with the Nasdaq 100 futures breaking below yesterday’s open and back into the previous trading range.
- STOXX 50 Index (EU50.I) – European equities are reacting to the news about US president Donald Trump has tested positive for Covid-19 but to the same degree as US equity futures. The first major key support level is at 3,136 and then 3,319. If these levels cannot hold today it opens for further declines in the short-term. We expect high beta sectors such as financials and consumer discretionary to lead the decline on the open.
- Long volatility (VOOL:xetr) - with the muted response in gold and US Treasuries it is getting obvious that long volatility component will begin to play a crucial part of controlling risk in portfolio and asset allocation strategies. VIX futures are touching 34 this morning up more than 3 points suggesting a big move in long volatility structures such as Long short-term VIX futures.
- EURUSD and AUDUSD - the US dollar was taken all the way to the brink of important local support before finding its legs again. With the rally overnight away from this support on US stimulus doubts and now Trump’s positive Covid-19 test, the final local support line is now somewhat clearer in EURUSD in yesterday’s 1.1765+ high and likewise, the 0.7200+ high in AUDUSD yesterday. Ahead of the weekend, the US dollar is likely to trade very reflexively with negative correlation to risk sentiment.
- EURGBP and GBPUSD – severe back and forth in sterling pairs yesterday as headlines touted the lack of sufficient progress in Brexit talks to achieve what some call the “landing zone” or the “tunnel”, which basically means that there is a strong enough agreement in principle for to the two sides to hunker down and hammer out the details of a post-Brexit transition deal over the coming weeks. The headline risk is extreme and traders are advised to consider limited-risk options strategies (long puts and calls or put- or call- spreads) to express a view over the next two weeks to 1-month (the horizon over which it could become clear that a deal is a go or a no-go and/or beyond the December 31 end date of the transition period.
- Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - overnight weakness in both metals on U.S. stimulus impasse turned to strength following the White House announcement that Trump and FLOTUS had both tested positive. Gold has now despite the stronger dollar returned above $1900 with its relative strength most visible against other currencies. The market will be trading nervous today as we have seen the virus can have many faces, from a Boris Johnson critical one to others who sailed through relatively unharmed. Overall, however this is not an event that leads to gold selling. Next up, monthly US job report and the U.S. stimulus impasse.
- WTI Crude Oil (OILUSNOV20) & Brent Crude Oil (OILUKNOV20) - extended yesterday’s losses on the Trump news and after chances of a U.S. fiscal stimulus package before the election faded. Overall the market has held up well during the past couple of weeks while the short-term fundamental outlook has weakened with the global energy demand recovery stalling amid rising Covid-19 cases around the world. Having failed to challenge resistance above $42.60/b, Brent crude is once again testing support at $39.50/b with the next level being $37/b.
What is going on?
- US President Trump and First Lady Melania Trump tested positive for Covid-19. The news broke overnight that Trump aide Hope Hicks test positive after she traveled with Trump aboard Air Force One on Tuesday and Wednesday to election rallies before feeling ill and self-quarantining on the plane on the return flight. The positive test result was announced by Trump himself this morning in early European hours.
- US House Democrats pass their $2.2 trillion stimulus plan with no Republican support - even as House Speaker Pelosi said negotiations with the White House would continue. Key points of contention include aide for local and state governments, with the White House not wanting to support what it sees as mismanaged Democratic strongholds. Time is running out for a deal with just over a month to the November 3rd election and Congress in recess soon to make room for election campaigning.
- US data was a mixed bag – with the weekly initial jobless claims still at a very elevated 837k, although this was slightly better than expected and the lowest weekly tally since the crisis began for the US economy. Better news was the weekly continuing claims data, which dropped by 1 million from its upwardly revised number and now stands below 12 million. The Sep. ISM Manufacturing number, meanwhile surprised slightly to the downside with a reading of 55.4 vs. 56.5 expected and 56.0 in Augusts. The employment sub-component was still below 50, even if the 49.2 reading was the highest in over a year.
- Eurocoin GDP growth indicator rose in September – first positive change since February’s reading suggesting that Europe’s economy is turning around. Even more positively it happens at a time with a resurgence in Covid-19 cases. If economic activity continues to improve the next couple of months, then this could turn into that positive narrative that Europe has lacked.
- New York City and State rating downgraded by Moody’s. The rating agency has downgraded bond rating for NY city and state to Aa2 from Aa1. The average 10 year spread of its debt versus a AAA rated state debt widened 55bps since the beginning of the year, making it more expenses for the state and municipality to raise capital.
What we are watching next?
- Progress on Trump’s Covid-19 recovery – markets will be tiptoeing on news about Trump’s recovery with potential downward moves linked to adverse developments such as those that happened to the UK PM Boris Johnson when he fell ill with Covid-19.
- Ant Group IPO – one the biggest IPOs in history is still pending with expected offering size at this point of $6.94bn. There is still no announced pricing date, but we expect it to be imminent.
Economic Calendar Highlights for today (times GMT)
- 0800 – Norway Sep. Unemployment Rate
- 0900 – Eurozone Sep. (P) CPI
- 1230 – US Sep. Nonfarm Payrolls & Hourly Earnings
- 1230 – US Sep. Unemployment Rate
- 1400 – US Aug. Factory Orders
- 1400 – US Final Sep. University of Michigan Sentiment
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.