Market Quick Take - October 8, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  Equities continued their comeback, with the US S&P 500 Index fully recovering to close at a new local high after President Trump appeared to soften his stance on a stimulus package. Many tech companies rose despite the House Antitrust report while Europe remains bogged down in the range that has dominated for months. Brexit ultimatums are flying left and right but are barely inspiring any volatility in sterling as it seems the market believes an eventual deal will be struck.


What is our trading focus?

  • Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the risk sentiment rebound has taken the broader market back higher to its highest close in nearly a month in the case of the S&P 500 while the megacap-heavy Nasdaq 100 has slightly underperformed. Flying somewhat below the radar is the fact that small cap stocks have been very strong over the last week and more and the Russell 2000 posted its highest closing level yesterday since the Covid-19 panic.

  • EURUSD and AUDUSD – the US dollar is firmly stuck in a rut in trading range terms, but has eased back lower toward the critical cycle support as a kind of mirror image of risk sentiment, which has improved since last Friday’s news of Trump testing positive for Covid-19. We watch for whether a move above 1.1800 in EURUSD and above 0.7200 in AUDUSD triggers more trading interest and an acceleration of the sell-off as this would point to the US dollar breaking down again.

  • AUDNZD – watching the NZD crosses today after a sharp, if somewhat modest sell-off overnight on comments from RBNZ Chief Economist Yuong Ha, who indicated an aggressive approach on providing further stimulus and said in an interview overnight that “We’d rather do too much too soon than too little too late.” The NZD has surprised somewhat with its resilience, given clear indication from the RBNZ that it is willing and actively preparing for a negative rate policy if needed. AUDNZD is back well above 1.0800 and needs to avoid slipping back below that level again for a look higher toward the 1.1000+ area that traded in the wake of the RBNZ’s initial dovish guidance.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - continued to stabilize in Asian trading following Tuesdays' sharp drop. The U.S. VP debate overnight had no impact on a market focusing on whether the Democrats and the White House can find common grounds for a stimulus package. Polls increasingly pointing to a Biden/Harris win on November 3 (see below), an event the market believes may turbo charge the reflation trade through more stimulus spending and with that support for precious metals and commodities in general. Overall gold remains stuck in a wide range around $1900/oz with the market potentially not yielding a clear direction until after November 3.

  • Treasuries 30-year auction (30YUSTBONDDEC20). The bull flattener that we have seen as Trump ended stimulus talks was short lived. During the day of yesterday Treasuries bear steepened with the 2s10s widening by approximately 5bps and the 5s30 steepening only by 2.4bps. The yield on the 2-year Treasuries rose by 1 bps which was the highest change since August. The 10-year auction was well received. As the curve continue to steepen and inflation expectations are rising as well, we might witness to a weaker 30-year auction today.

  • EasyJet (EZJ:xlon) - reports preliminary earnings showing expected loss for the FY2020 (ending 30 September) of £815-845mn. Expects around 25% capacity utilization in Q1 FY21 (current calendar quarter). The UK airliner has told the government that it may need more help to weather the crisis. The company has suspended dividend and is not providing any guidance for FY21.

What is going on?

  • A very normal Vice-Presidential debate provided few headlines of note as the debate contrasted with the presidential debate with civil exchanges and a lack of the drama. As Harris avoided any notable gaffes this debate – the only one to be held by the two vice presidential candidates before the election on 3 November – is unlike to drive any shift in polling. In fact, some recent polls continue to show the Biden/Harris ticket gaining, with fivethirtyeight.com’s measure of the lead edging to nearly 10% now.

  • Chicago Wheat (WHEATDEC20) has reached a five-year high while Soybeans (SOYBEANSNOV20) trades at the highest since 2018, as dry weather threatens planting in both North and South America as well as the Black Sea area. Following the biggest quarterly surge in food commodities since 2016, the market will focus on twin insights from the USDA in its monthly WASDE report tomorrow and today the United Nations data on global food prices. It is likely to show another jump after hitting a six-month high in August. An unexpected decline in US inventories, strong U.S. export demand from China together with the growing concerns over La Nina are all potential strong forces that may support a grain and soy sector that has rallied by 23% in just two months.

  • Brexit brinksmanship fails to trigger much GBP volatility – the EU side tried to indicate it was calling the UK’s bluff on an October 15 negotiation deadline for a post-Brexit transition period deal, and French president Macron made aggressive comments on UK fisheries, but yesterday the EU negotiator Barnier asked member states to be flexible on fisheries, while UK Prime Minister Boris Johnson claimed he was ready to pull out of talks if his original October 15 deadline for an agreement is not met. All the while, GBP is treading water, suggesting that the market thinks this is just noise and a deal will eventually be struck. That view needs a key positive headline on agreement before October 15 it would seem.

  • Turkey says that 2020 Eurobond sale was oversubscribed by 3x. The country has reopened its 2025 bond issuance ahead of the US election. The bond priced in line with guidance price of 6.4%. The success of the bond sale is surprising because it comes as the country is planning to test Russian made missiles in defiance of US complaints. In our emerging market analysis, Turkey appear to be the riskier EM together with Argentina in term of default risk. Moody’s downgraded the country to five levels below investment grade last month.

What we are watching next?

  • 30-year Treasury auction today. As the US yield curve resumes its steepening, the market is preparing for the 30-year Treasury auction today. It will be interesting to see if there will be weaker demand for long term treasuries especially in light of the fact that yesterday for the 10-year Treasury auction we have seen less direct bidder, that were, however offset, by higher volumes of indirect bidders.

  • Hungary September CPI and 1-week Deposit Facility announcement today – before the Covid-19 crisis, Hungary’s currency the forint (HUF) was losing ground as inflation had risen to above 4.0% while the central bank policy rate was stuck near zero – meaning an alarming negative real interest rate for holders of HUF. In the wake of the crisis, the Hungarian CPI has been very quick to bounce back and even posted a 3.9% level in August. The HUF has staged a modest recovery after a small surprise 15 bps hike took the 1-week deposit rate to 0.75%, but Hungary and its neighbor Poland (struggling with the same issue) remain interesting countries to watch for the risk of negative real rates challenging their ability to avert further currency devaluation.

Economic Calendar Highlights for today (times GMT)

  • 0700 – Hungary Sep. CPI
  • 0800 – UN FAO’s Sep. Food Price Index
  • 0950 – Hungary Central Bank 1-week Deposit Facility announcement
  • 1100 – Mexico Sep. CPI
  • 1130 – ECB Meeting Minutes
  • 1215 – Canada Sep. Housing Starts
  • 1230 – Canada Bank of Canada’s Macklem to Speak
  • 1230 – US Weekly Initial Jobless Claims and Continuing Claims
  • 1315 – US Fed’s George (Non-voter) to Speak
  • 1430 – US Weekly Natural Gas Storage
  • 1610 – US Fed’s Rosengren (Non-voter) to Speak

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