Market Quick Take - April 1, 2020
Chief Investment Officer
Summary: Markets are soft overnight after a choppy last-day-of-the-quarter session yesterday that failed to take out key resistance levels. The USD traded softer after the Fed announced yet another initiative yesterday, this time a repo facility with foreign central banks allowing them to swap treasuries for US dollars. We continue to watch the USD and risk sentiment as a new calendar quarter unfolds.
The broader US market never took out the key local resistance we have been eyeing – 2641 in the S&P 500 index, despite the purportedly enormous quarter-end flows. We watch for market direction now as a new quarter unfolds as well as whether the Fed has done enough with its latest facility to slay the “killer dollar”.
What is our trading focus?
- US100.I (NASDAQ 100) – a more technical pattern in the Nasdaq relative to the broader market yesterday, as new highs were posted intraday close to 8000 before the index weakened rather sharply into the close and then badly overnight – this sets up a technical argument for fresh shorts. The next key support level is at the 23.6% retracement level at 7,368.
- HSBA:xlon (HSBC) – shares down 9.3% in Hong Kong trading as the bank cancels the Q4 dividend of $0.21 per share as UK and European banks have been under pressure from BOE and ECB to cut dividends and bonuses to preserve capital.
- USDMXN – the Federal Reserve move yesterday was aimed at preventing foreign reserve holders from dumping their treasuries in a scramble for US dollars and is theoretically USD negative. USDMXN is a currency sensitive to both oil prices (domestic tax revenue from Pemex), USD funding and the US economy and is the largest of USD/EM crosses and is a reasonable proxy on whether the Fed is providing enough USD to prevent further global strain from the “killer dollar”.
- USDJPY – still looks pivotal in the 107-108 area as the pair has failed to show a trend after wild gyrations in recent weeks. Now we are clear of end-of-quarter and end-of-Japanese financial year considerations and the Fed has announced a repo facility for holders of US treasuries to repo them for USD as needed.
- ABT:xnys (Abbott Laboratories) – still in focus as the company’s 5-minute COVID-19 test could become a big product for the companies as widespread testing is essential for slowly opening up countries that have been in lockdown.
- USDHUF – rule by decree for PM Orban (see below) and credit spreads have blown wider for Hungary’s foreign currency denominated debt – EURHUF continues to rally this morning. HUF is perhaps the weakest link in the EU along existential lines.
- XLE:arcx (US energy sector), OIH:arcx (US oil services), OIL:xpar (European oil and gas) – Brent crude has rebounded above $25/brl as a tripartite meeting between the US, Saudi Arabia and Russia was hinted at yesterday by US president Trump to see what could be done to stabilize the oil market.
- VOPA:xams (Vopak), EURN:xbru (Euronav) and FRO:xosl (Frontline) - oil tank firm Vopak and ship owners such as Euronav and Frontline could benefit from the storage space crisis in the oil industry.
- OILUKMAY20, OILUSMAY20: Crude oil remains under pressure from a massive overhang of supply and the end of the OPEC+ deal to curb production. The EIA will release its weekly storage report later today and it could get ugly. This after the American Petroleum Institute yesterday said that oil and gasoline stocks jumped by 16.5 million barrels last week. More than three times what surveys have been pointing to. The OPEC+ agreement to curb production has now expired with focus on what Saudi Arabia and Russia do next.
What is going on?
The US Federal Reserve announce a new facility called FIMA that allows central banks and monetary authorities globally to repo their treasury holdings for short-term US dollar loans. The facility is clearly aimed at preventing a fire sale of treasuries globally (which the Fed would have to buy anyway) to raise dollars for other funding needs.
US March Consumer Confidence fell to 120 from 130 in February, a number that looks suspiciously high and slow to absorb the impact of the Covid19 crisis and widespread job losses, as this indicator usually correlates closely with job market prospects.
Covid-19 – US President Trump projected up to 240,000 deaths in the US from the Covid19 outbreak and said the next two weeks would be very tough.
The FT reports that the weaker EM economies around the world are in dire shape and 85 of them have appealed to the IMF and World Bank for help. Smaller oil producers and commodity exporters are especially hard hit. Zambia yesterday sought advice from advisers as it needs to restructure some $11 billion in foreign obligations.
What we are watching next?
Nasdaq 100 as a high beta index – as noted above, the Nasdaq gunned for new local highs yesterday and was turned back sharply by the market close, while the broader market has languished in relative terms – especially small caps.
EU existential crisis or not – the first round of floating the idea of coronabonds was firmly rejected by a number of countries, most vocally by the Netherlands’ leader Mark Rutte. But two of the parties in the government coalition in the Netherlands have come out strongly against his stance and in favour of the bonds to support southern Europe’s struggle. The EU needs to attack this crisis with full solidarity and some form of mutualization, whatever the approach, and the clock is ticking loudly.
US ADP Payrolls Change – this is a private survey that is released today, two days before the Friday Nonfarm Payrolls Change. Will be interesting to note the size of the drop ahead of tomorrow’s weekly initial jobless claims and the data Friday. Bloomberg expectations are at
Path to the other side of Covid-19 – this remains the medium term key.
Calendar today (times GMT)
- 0715-0800 – Euro Zone Mar. Final Manufacturing PMI
- 1215 – US Mar. ADP Employment Change – the most anticipated calendar figure today
- 1400 – US Mar. ISM Manufacturing Survey – also highly anticipated for an indication of the scale of Covid19 shutdowns
- 1430 – US Weekly DoE Crude Oil and Product Inventories
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