Market Quick Take - September 1, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  The US dollar has tipped over to new lows of the cycle, with EURUSD finally joining the party overnight as it threatened the 1.2000 level for the first time in over two years. The broad US market posted its first negative session in eight days yesterday and Asian markets were generally lackluster despite US futures bulling back higher overnight. The weak USD has gold within reach of 2,000 per ounce again.


What is our trading focus?

  • S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – the S&P 500 index posted its first negative session in eight yesterday, with a modest drop on the day after trading briefly at new highs, while the Nasdaq 100 index pull higher to a new record close above 12,000, with the action buoyed further overnight by strong Zoom results (see below). The divergence between the high-flying megacaps and notable bubble stocks remains extreme as small caps suffered a weak session and the S&P 600 small cap index closed at a six-day low.

  • STOXX 50 Index (EU50.I) – whether due to the strong euro or for other reasons, European equities continue to suffer within the limbo of recent tight ranges, unable to break higher like their US counterparts, and yesterday was one of the weaker sessions recently as the STOXX 50 closed more than a percent lower and drove the index more deeply back into the recent trading range, and thus back below the 200-day moving average, currently at 3,308.

  • Spot Gold (XAUUSD) & Spot Silver (XAGUSD) - The combination of a weaker dollar, lower real yields and the US Fed Vice Chair Clarida talking about yield-curve control are once again driving precious metals higher with gold moving towards $1200/oz while silver (XAUXAG<69.40) has reached its strongest level against gold since April 2017. The dollar trades weaker and is now challenging the closely watched 1.20 level against the euro while U.S. 10-year real yields have slumped to a record low at –1.1% as inflation expectations (Breakevens) continue to get bid higher following Clarida’s speech yesterday (see below). Gold’s next level of resistance remains $1215 while silver does not have any significant levels ahead of $30.

  • WTI Crude Oil (OILUSOCT20) & Brent Crude Oil (OILUKNOV20) - continue to trade steady with continued virus worries being off-set by the weaker dollar, stronger Chinese data and surveys pointing to another drop in crude stocks. WTI remains anchored around $43/b and Brent around $45.5/b. (Note: November Brent is now the front contract). Focus today the dollar, monthly OPEC production survey from Bloomberg and tonight's inventory report from the American Petroleum Institute.  

  • HG Copper (COPPERUSDEC20) - has reached a two-year high as it continues to build on gains above the former resistance at $3/lb ($6,600/t on LME). The renewed momentum which has been driven by tight market conditions, a weaker dollar and better than expected data out of China, the world’s biggest consumer. Having broken firmly above $3/lb, bulls are now hoping that the current momentum can carry the metal towards the 2018 highs around $3.30/lb. 

  • EURUSD EURUSD poked to new highs for the cycle overnight, approaching 1.2000 for the first time since May 2018 and finally joining other USD pairs, where the USD has been dropping to new lows recently. As noted below, preliminary August Euro Zone CPI is up today and is expected to show a low reading. This could have the ECB out with a more aggressively dovish tone at its meeting next week and EURUSD is more than a bit “special” in speculative positioning terms at a record extreme net long in the US futures market as of a week ago, so traders will watch whether 1.2000 serves as any kind of barrier here to further upside.

  • AUDUSD - the AUDUSD surged to new cycle highs above 0.7400 overnight as the RBA met overnight. The bank left its policy rate unchanged at 0.25% (and 3-year yield target likewise at 0.25%) and guidance was cautious, but it did more than double the Term Lending Facility (similar to the ECB’s TLTROs) to AUD 200 billion. There was only passing mention of the Australian dollar. Note the weakness in the Australian equity market noted below as a factor potentially affecting the AUD outlook here.

  • Apple (AAPL:xnas) - shares were up 3.4% yesterday post its stock split. News yesterday also suggested that Apple has asked its suppliers to build at least 75mn iPhones with 5G capability in a sign that the world’s most valuable company sees strong demand. In addition to the new iPhone rollout the company is expected to present a new iPad Air and two new Apple Watch versions and much more.

  • Zoom Video Communications (ZM:xnas) - the poster child company of the COVID-19 lockdown phenomenon, Zoom reported blowout Q2 earnings as its revenues rose 355% and profits doubled. Estimates were looking for a 255% y/y growth rate in revenue. In after-hours trading, the shares tacked on over 20% late yesterday in the wake of the results. Zoom forecast projected revenues would total some 2.39 billion this year, with an adjusted profit between $2.40 and $2.47 per share, almost double consensus estimates.  

What is going on?

  • US Fed’s Clarida mentions yield caps as a Fed policy tool US Fed Vice Chair Clarida widely considered influential in setting the Fed’s policy, was more specific in discussing an eventual yield-curve-control (YCC) policy in a speech yesterday than was Fed Chair Powell in a major speech last week. Clarida said that while conditions were not "warranted” at the present time, but “should remain an option that the committee could reassess in the future if circumstances changed markedly.” Whether for this or for other reasons, the USD dropped to broad new lows and long US yields have remained rangebound, avoiding acting as any sort of brake on the rise in speculative assets.

  • Germany’s Aug. Flash CPI out at –0.1% MoM and 0.0% YoY, both 0.1% lower than expected - as the rising euro is seeing EURUSD threaten 1.2000 and with Euro Zone CPI is up today, a miss in the inflation rate for the broader Euro Zone (core CPI expected to match multi-year lows at +0.8% year-on-year) will heap pressure on the ECB at its meeting next week to do more, likely moving forward its decision to add to its QE target to absorb more of the projected fiscal deficits across the EU.

  • South Korea plans new record bond sales to fund stimulus which is planned to reach 8.5% of 2021 GDP in order to sustain the rebound in the South Korean economy post the pandemic. The main question for investors is how much more bond supply globally can be expanded without putting pressure on bond yields. KOSPI 200, the leading equity index in South Korea, rose almost 1% on the stimulus news.

  • Australian news anchor detained in China – this news item may be behind the have impacted Australia’s equity market if not its currency overnight, an Australian news presenter working with the English language broadcasts of Chinese news in mainland China was detained, with the Australian government saying it was not told why. The Australia ASX-200 was trading in a rather quiet range near its 200-day moving average recently before an ugly drop of –1.5% as of this writing. It should be noted that Australia sits in a very uncomfortable spot as the US and China are showing signs of a profound disengagement over the long term, as Australia’s economy is heavily dependent on exports to China, while it maintains political alliances and cooperates on intelligence matters with the US and its allies.

What we are watching next?

  • Euro Zone CPI and remaining global manufacturing PMIs up today – As noted above, the Euro Zone flash Aug. CPI estimate could impact the ECB next week, and the euro today. As for August Manufacturing PMIs, we have had a look at the readings for Japan, South Korea, and China overnight. The former two continue to show contractions with readings of 47.2 and 48.5, while China’s Caixin PMI was out at 53.1.  In Europe, we will have a look at the final readings for August (where France was the weak spot at 49 according to preliminary readings) and have a look at the August US ISM Manufacturing later, expected at 54.8 vs. 54.2 in Jul.

  • Global state of the economy as we have a busy week ahead on the economic calendar, with global August Manufacturing PMI’s up for most major countries today and the Services PMI up on Thursday, followed by the latest monthly payrolls change and unemployment rate for the US on Friday.

Economic Calendar Highlights for today (times GMT)

  • 0715-0800 – Euro Zone Aug. Manufacturing PMI
  • 0755 – Germany Aug. Unemployment Rate/Change
  • 0830 – UK Aug. UK Manufacturing PMI
  • 0900 – Euro Zone Aug. Flash CPI
  • 1400 – US Aug. ISM Manufacturing
  • 1700 – US Fed’s Brainard to Speak
  • 0030 – New Zealand RBNZ Orr to Speak
  • 0130 – Australia Q2 GDP

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