Market Quick Take - October 23, 2020

Macro 6 minutes to read

John Hardy

Head of FX Strategy

Summary:  Markets generally traded in tight ranges yesterday, though we continue to note the loud signal the US bond market continues to throw off as longer US treasury yields have risen to nearly their highest level since the spring. The second and final US presidential debate was far more civil than the first and many declared Trump a marginal winner. Today, global October flash PMI readings are the calendar focus.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities are facing headwinds from rising US yields, especially at the long end of the curve, and another delay of stimulus talk meaning equities are headed into the weekend with more uncertainty. The 50-day SMA was the support level in yesterday’s selloff and thus is most likely to be pivotal again today if risk-off mood accelerates into the weekend.

EURJPY and AUDJPY– JPY crosses are worth keeping an eye on here after USDJPY poked below the important 105.00 level this week and as AUDJPY in particular trades near a major level around 74.00. That pair is a classic barometer of risk sentiment within G10 and a breakdown of nearby key pivotal levels in the major US indices could see JPY volatility spike significantly. EURJPY is in a similar state if even if downside pivot levels are somewhat farther away. Downside options strategies in EURJPY and AUDJPY are perhaps interesting ways to hedge for any US election disruption that lurches global markets into a period of uncertainty.

EURGBP and GBPUSD – sterling tried to piece together a rally on the news of a resumption of Brexit talks but has faltered a bit since then – the GBPUSD rally needs to survive above 1.3000 to maintain upside interest, but the price action just emphasizes we are waiting for the key headline that announces a deal in principle is in place – and we may be left waiting another week or more for that announcement, with mid-November thought by many to be the likely time frame for agreement, if it is forthcoming.

Thirty-year Treasury yields rose sharply yesterday (30YUSTBONDDEC20)– During the day of yesterday we have seen the US yield curve steepening with 30-year yields rising above 1.68%. During the debate, yields retreated just a couple of basis points, indicating that further steepening might come as the election approaches. For bond investors is crucial to understand what are going to be the FED’s next steps. Today, the President of the New York Fed Logan speaks about market liquidity, we are watching out for any indication that point to an increase of bond purchases on the long part of the yield curve.

Italian BTPs (10YBTPDEC20) well bid even amid a rise of coronavirus cases. Italy has started to impose restrictions and curfews in an effort to curb coronavirus cases. BTPs has been falling as it is clear that a second wave of Covid-19 will most likely hurt the economy further. However, yesterday syndication issuance of 30-year BTPs was well received by the market and the country paid the lowest spread for a syndication issuance since 2018. The market is obviously is weighting in an increase of ECB accommodative measures.

Intel (INTC:xnas) - Intel dropped heavily in after hours on weak results and forecast – Intel reported earnings after the close yesterday and reported an unexpected fall in data center sales of 10% and issued a weak forecast on that front. Fourth quarter revenue was forecast to drop 14% from last year and margins saw pressure from competitors while July saw the company announcing a major delay in its latest 7 nanometer manufacturing process.

Daimler (DAI:xetr) - Q3 revenue is €40.3bn vs est. €40.7bn down 7% y/y but EPS at €2.09 was up 33% from last year highlighting solid cost controls. Management is raising its forecast for FY20 driven by a strong rebound in China.

What is going on?

The Bloomberg Grains Index reached a 15-month high this week and has now rallied more than 25% from the August low. While the wheat market paused following its recent surge, the rally in corn and soybeans extended further on concerns about global production at a time of strong demand. Dryness blamed on La Nina is fueling South American production concerns at a time where China has undertaken a massive restocking program. Potential South American and Black Sea rainfalls hold the short-term key with a very extended hedge fund long posing a correction risk.

Turkey failed to hike its headline repo rate – leading to new record lows for TRY – central bank officials cited progress on normalization trend in consumer and corporate credit and a moderation of pandemic-linked imports, as well as a strong recovery in exports, even as it noted inflation was higher than desired. The more complex “rate corridor” was widened, but the general takeaway is that the bank’s move was a dovish surprise in a country in a fragile financial situation.

Initial jobless and continuing claims fell to 787K and 8373K - showing further progress in the US labour market. Continuing claims are down 66% from the peak in May but there is still a lot of uncertainty and chaos over the numbers due to all the different income aid programs launched during the Covid-19 pandemic. The NY Fed Weekly Activity Index (real-time weekly GDP tracker on the US economy) was revised up to -3.8% (the estimated GDP change from a year ago) up from the low of -11.5% in the last week of April.

The second and final US presidential debate was a more civil affair than the first. Commentators widely declared Trump a marginal winner. At one point, Biden made an ill-advised statement claiming he would transition from the oil industry, to which Trump asked viewers in Texas, Pennsylvania and other areas if they would remember what Biden had just said. Accusations of corruption and foreign influence peddling abounded. Before the debate started yesterday, nearly 49 million Americans had already voted in early voting across the country.

What we are watching next?

Global commodity markets will face an important week with a number of Big Oil companies (Royal Dutch Shell, Equinor, Exxon Mobil, Chevron, Total) reporting results at a time where the sector is out of favor among investors and crude oil remains stuck in the low $40’s while a resurgent coronavirus pandemic triggers fresh curbs on mobility. The countdown to the U.S. presidential election will be watched closely given the potential different trajectory for wind, solar and emissions rules. In China, the world’s by far biggest consumer of raw materials, the CCP will gather to map out the party’s priorities for the next five years and beyond. Crop giants like Bunge Ltd and Archer-Daniels-Midlands Co also reporting earnings following a massive quarter for the sector.

US stimulus package status? Nothing new here, with House Democrat Speaker Pelosi making further noises about almost being there on a deal, but with the key sticking points of state and local aid that Trump has railed against (because they are, to paraphrase, “poorly run by Democrats and generally high-crime") The ballpark figure for a package is said to be some $2 trillion in size, and the question remains whether enough Senate Republicans will sign on to pass it. Time for getting stimulus done has slipped to the extent that the final votes may not be able to happen until after Election Day – a prominent risk if the election is contested.

UK and EU flash October PMIs up today. An EU confidence survey yesterday and the UK GfK Consumer Confidence survey out overnight showed confidence dipping in October, likely on the ugly resurgence of Covid-19 numbers. The UK number dropped all the way to –31 versus –28 expected and –25 prior. The flash October Services PMI for the UK and the EU in particular today could point to an ongoing sluggish recovery and even some tendency toward a double dip risk.

US Q3 earnings season continues and picks up this week: American Express (today), Daimler (today), Kweichow Moutai (weekend).

Economic Calendar Highlights for today (times GMT)

0715-0800 – EU Flash Oct. Services and Manufacturing PMI

0830 – UK Oct. Flash Oct. Services and Manufacturing PMI

1030 – Russian Central Bank announces policy rate

1200 – Russian Central Bank governor Nabiullina press conference

1345 – US Oct. Flash Manufacturing and Services PMI

 

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