Market Quick Take - September 22, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  The US equity market correction continued yesterday in the US before rebounding in early trading, with the Nasdaq 100 Index even closing the day on a high note for the day. The European session today will prove interesting for any positive contagion from this comeback after European equities suffered their worst drop in months yesterday. Precious metals suffered a steep sell-off yesterday, with their bounce from the lows cut a bit short, perhaps as the US dollar rallied hard yesterday.


What is our trading focus?

  • S&P 500 Index (US500.I) & NASDAQ 100 Index (USNAS100.I) – the comeback for the Nasdaq 100 yesterday was far more impressive than for the broader market, where the S&P 500 closed some over a percent lower. The next hurdles for brightening the near-term outlook are taking back the key levels that were broken on the way down, like the 11,000+ area in the Nasdaq 100 (prior low was 10,924, the 55-day moving average is 11,170). For the S&P 500, the former range lows just below 3,290 were exactly where resistance was found in the futures market overnight and the 55-day moving average is near 3,315.

  • STOXX 50 Index (EU50.I) – after being a low volatility index for six weeks being almost immune to the heightened volatility in US indices and recent selloff in Nasdaq 100 the STOXX 50 futures were down 4.4% yesterday. It felt like a technical-driven low liquidity even with financials selling off on the HSBC story of potentially being added to China’s “unreliable entity list” and then spreading to other segments of the market. Nervousness over COVID-19 could also have played a role but the trajectory has been clear for weeks so yesterday did not present any new binary information on the virus. European equities are the lows but still under pressure.

  • Spot Gold (XAUUSD) & Spot Silver (XAGUSD) - Yesterday’s risk off selling that was led by a stronger dollar and sharply lower stocks (before a late U.S. bounce), saw gold drop below key support at $1900/oz before ending the day above. Silver got hammered and finished the day down by 7.7%, but just like gold managed to bounce before hitting the August lows at $23.45/oz and $1863/oz. The otherwise bullish sentiment and outlook with ETF holdings reaching a fresh record yesterday, has received a knock with dimming outlook for further U.S. fiscal stimulus, rising Covid-19, U.S.-China tensions and potential increased volatility around the presidential election. Today it will be critical for gold to stay above $1900/oz, otherwise a deeper correction to $1825/oz could emerge. Focus again on dollar and the stock market.

  • WTI Crude Oil (OILUSOCT20) & Brent Crude Oil (OILUKNOV20) - The Saudi inspired short-covering rally proved short lived amid a broader selloff and signs of a demand disruptive rise in coronavirus cases leading to new lockdowns around the world. Together with the expected reopening of Libya’s oil industry, the market took fright with Brent falling to $41/b, the 61.8% retracement of last week’s rally. A break below could signal a renewed test of the recent lows around $39.30/b. Late in the day, the weekly stock report from the American Petroleum Institute.

  • EURUSD & AUDUSD – These two USD pairs are in a similar technical situation ahead of important downside pivot zones, having sold off steeply yesterday on the sudden return of USD strength. Whether these pivot zones – in respectively the 1.1700-1.1735 area in EURUSD and extending just below 0.7200 in AUDUSD – give way offers us a broad sense of the status of the US dollar and whether it can rally onto the comeback trail.

  • NZDUSD & AUDNZD - watching NZD pairs on the RBNZ meeting tonight after a recent strengthening move in kiwi that has AUDNZD testing an important pivot zone around 1.0800 that it recent fell through before recovering. The RBNZ has made it clear that it is readying for negative rate s if needed and has a more aggressive stance on the NZD level, which managed to hit a 17-month high against the USD on Friday before tumbling yesterday on broad USD strength.

  • JPY vs. USD in the crosses – as noted yesterday, the JPY was stealing the spotlight in rallying broadly in recent sessions, but the US dollar took over as the preferred safe haven yesterday. As we watch whether risk sentiment recovers, we will watch whether USDJPY manages to stay below the critical 105.00 level or cements the recent break with a run to the 100.00 area support from 2016.

  • Nikola (NKLA:xnas) and General Motors (GM:xnys) - Nikola shares tumbled 19% after being down as much as 30% as the CEO and co-founder stepped down after fraud allegations by a short seller report and ongoing probe by Department of Justice and SEC. The rebound was likely driven by sentiment improving on the comment from GM that said that the carmaker would work close with Nikola to closer their deal highlighting confidence in their due diligence and view of the technology.

What is going on?

  • The Swedish Riksbank in hot water over its corporate bond buying programme after it redacted large portions of a report sent in response to a Bloomberg request for information on how it had hired BlackRock to conduct its corporate bond purchase programme. The Bloomberg article says that the legal adviser to a parliamentary committee current drafting a new Riksbank Act says the Riksbank purchase programme may be unlawful. The Riksbank meets today.

  • US earnings today from Nike (NKE:xnys) and AutoZone (AZO:xnys). Nike reports after the US market close with analysts expecting FY21 Q1 (ending 31 August) revenue to be down 15% y/y and EPS down 46% y/y as retailers are still struggling under COVID-19 restrictions around the world. But despite revenue and earnings are much lower analysts expect Nike to return to operating profit for the quarter. AutoZone reports FY20 Q4 (ending 31 August) before the US market open with analysts expecting revenue being up 4% y/y and EPS up 20% y/y as the company has come through the pandemic with minimal wounds despite the overall car market being under severe pressure.

  • Precious metals current inability to weather the storm seen across other assets classes was on full display during yesterday’s selloff when they took a bigger hit than growth dependent sectors such as industrial metals and energy. A combination of technical selling on the break below $1900/oz and the stronger dollar all supported the drop. It also once again highlighted the battle between short-term technical traders selling futures and long-term investors increasing holdings in ETF's backed by the most in more than four years. We maintain a positive outlook but yesterday’s price action was another reminder that nothing ever goes in a straight line, especially not precious metals.

  • Argentina dollar bonds fell into distressed territory - The country had restructured its debt two weeks ago, however as the government tightened FX controls the bonds fell into pre-debt deal prices.

  • North America junk bond credit risk rises amid equity selloff- The CDX High Yield spread widened 25 basis points as the stock market slid yesterday. Companies had to pull their debt deals and for the first time since March the primary market  saw no deals. We believe that this is a powerful indicator of market stress.

What we are watching next?

  • US President Trump met with a conservative judge widely considered a top nominee for Supreme Court. The judge, Amy Coney Barrett, a conservative Catholic and considered as a lock to have an anti-abortion stance, could be nominated as early as later this week. It is unknown how many Republican senators may refrain from voting on a Supreme Court nominee this close to the election and appointing as controversial figure as Bennet to replace the very liberal Ginsburg less than seven weeks before the election has outraged Democrats, who won’t be in a mood to strike a deal on further stimulus measures.

  • A busy economic calendar this week, in which we get the first look at flash PMI readings around the world on Wednesday – perhaps most interesting for Europe with the significant resurgence in virus cases that has accelerated in some spots – especially France – at the weekend. We also have US Fed Chair Powell before Congress today, tomorrow and Thursday. And interesting central bank meetings, like the one for Turkey on Thursday, where the bank has changed its tune and is likely set to hike rates to defend against disorderly TRY weakening. The RBNZ, as noted above, meets tonight.

  • Tesla’sbattery day’ is today and will be held together with its annual shareholder meeting starting at 16:30 EST (00:30 GMT). The Japanese news media Nikkei reported back in August that Panasonic has planned to invest $100mn in a new setup for cell production at the Nevada Gigafactory. This could indicate that Tesla will announce a new updated design for its batteries which will most likely come with two important updates: 1) higher energy density, and 2) lower production costs. This would extend the lead Tesla has over its competitors and likely drive volatility in its shares.

Economic Calendar Highlights for today (times GMT)

  • 0730 – Sweden Riksbank Announcement
  • 0800 – ECB's Villeroy to Speak
  • 0900 – Sweden Riksbank Press Conference
  • 1200 – Hungary Central Bank Rate Decision
  • 1400 – ECB's Lane to Speak
  • 1400 – Euro Zone Sep. Consumer Confidence
  • 1400 – US Aug. Existing Home Sales
  • 1430 – US Fed Chair Powell, US Treasury Secretary Mnuchin to Appear before House Panel
  • 2030 – Weekly stock report from American Petroleum Institute
  • 0200 – New Zealand RBNZ Official Cash Rate Announcement

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