Market Quick Take - August 10, 2020

What is our trading focus?

• S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – US technology stocks are range trading a bit extending on the mixed Friday session following a few disappointing earnings releases among technology companies in the mid-cap segment. S&P 500 on the other hand is pushing higher and is now only 1% away from new all-time highs. Trump’s extending of emergency support for US families and the low US real yield are holding up equities.
  
  
• German DAX (DAX.I) - is responding to the positive session in Asia with especially Australian and South Korean equities moving higher as the European continent is depended on Asia bouncing back due to its importance for Europe’s export machine. Last week’s highs at 12,796 is the next critical price point for traders before an attempt at 13,000 could come into play. The rally in EURUSD has also firmly ended over the past week adding a bit of support for European equities.
  
  
• Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - have both managed to hold above Friday’s low which was triggered by the real yield reversal following stronger than expected U.S. jobs data. However, following a breath-taking three-week rally, both metals probably need to consolidate their gains before eyeing additional upside potentials. The latest COT report covering speculators behavior in the week to August 4, found that for a second week hedge funds had failed to join the exuberance being exhibited by record ETF flows. Both metals witnessed a second week of net-selling, primarily driving by fresh short positions. Most noticeable in silver where funds in a two-week period to last Tuesday cut bullish bets by one-third while the metal surged by more than 22%. Focus on the dollar, U.S. real yields, US-China developments as well as earnings from Barrick Gold Corp.
  
  
• Brent Crude Oil (OILUKOCT20) and WTI Crude Oil (OILUSSEP20) - have kicked off the week on a firmer footing after Saudi Aramco predicted demand, despite regional covid-19 problems, will continue to recover through the rest of the year. Chances of a strong recovery in U.S. shale oil production meanwhile received a further knock after the number of active drill rigs fell to lowest since 2005. Market however remains summer rangebound with the latest news potentially not enough to kick some life back into the market. A trio of monthly oil market reports, projecting supply and demand, await the market this week with EIA reporting on Tuesday, OPEC on Wednesday and IEA on Thursday.
  
  
• EURUSD – the USD has recovered from a cycle low following Friday’s job report which supported short-covering. According to the latest COT report, speculators lifted their dollar short across ten IMM currency futures to a nine-year high in the week to August 4. However, just like the previous five weeks, the expanding dollar short position was almost solely driven by another rise in the euro net long to a fresh record of €22.6 billion. On that basis the dollars short-term outlook remains closely tied to developments between these two major currencies.  Focus on resistance at 1.19 with consolidation risk to 1.1625 (the 38.2% retracement of the latest strong rally wave in July).

What is going on?

• US President Trump issues executive orders to extend coronavirus economic relief which has already been criticised over the weekend by the Democrats as unconstitutional and insufficient. Trump’s order provides $300 per week in special unemployment benefit with $100 per week more coming from states.
  
  
• EM currencies still under pressure with USDTRY trading higher again today as the capital bleeding has no ending in sight yet for Turkey as currency reserves are drying up. USDZAR is a bit firmer this morning but USDBRL and USDCPL are the biggest movers today seeing the Latin American currencies decline by almost 2%. So far, the weaker EM currencies have not created spill over effects into other markets and EM equities remain quite bid and close to the highs back from January.
  
  
• Chinese technology companies are trading lower highlighting the continuing impact from Trump’s executive orders banning TikTok and WeChat in the US. News that Huawei is running out of processor chips due to US sanctions also added to the negative sentiment around Chinese technology stocks.

What we are watching next?

• Where’s the next round of US stimulus? The two sides were unable to come together in the latest round of negotiations which caused Trump to issue executive orders on special unemployment benefits. The Democrats are aiming for a large stimulus package of $3.4trn while Trump wants to keep it around $1trn. The negotiations have not become easier by the fact that the US election is upcoming in less than three months. Given the importance of fiscal stimulus in keeping the economy going the stimulus deal on extending emergency support for the US economy is important for markets.
  
  
• US-China trade deal review meeting on August 15 to discuss the progress so far on the trade deal signed earlier this year. Under the first phase of the trade deal China pledged to boost purchases of US goods by around $200bn over the 2017 levels across agricultural and energy sectors. So far, China has bought 5% of the energy products needed to meet the phase one first year goal. China has said the COVID-19 crisis has delayed purchases.
  
  
• The US 10-year real yield hit cycle low on Thursday at –1.08% driving rallies last week in technology stocks and gold. The relentless decline in past two months have caused entropy in markets to down significantly and driving up cross-correlations to an extend where the market’s fragility could sudden burst into a new violent volatility jump.
  
  
• US July CPI numbers are due Wednesday with consensus looking for a 0.3% m/m jump extending on June’s 0.6% m/m jump. Real yields have been one of the market’s obsessing points the last couple of months as their collapse have been driving the ‘everything bubble’ across all asset classes despite the ongoing pandemic and economic fallout. Real yields are measured using break-even rates which are tied to inflation-projected government bonds, but others are using realised inflation numbers and as such the CPI number could get a fair amount of attention this week.

Economic Calendar Highlights for today (times GMT)

• 0600 – Norway Jul. CPI
• 0830 – Eurozone Aug. Sentix Investor Confidence
• 1215 – US Jul. Housing Starts
• 1400 – US Jun. JOLTS Job Openings
• 1230 – US Jul. Average Hourly Earnings
• 2350 – Japan Jun. Current Account