Market Quick Take - August 12, 2020

Macro

Ole Hansen

Head of Commodity Strategy

Summary:  The S&P 500 benchmark fell for the first time in eight days yesterday while the technology-heavy Nasdaq traded lower for a third day. Another rise in US bond yields ahead of three key bond auctions weighed on all markets with a correction in gold and silver turning decisively ugly. News that stimulus talks have reached a stalemate in Washington also weighed on the markets.


What is our trading focus?

  • S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – US equities were not immune to chaos in precious metal and rising yields yesterday. Technology stocks were leading the declines throughout the entire session as these stocks with their higher duration are more sensitive to interest rate changes. Both S&P 500 and NASDAQ 100 futures are up 0.8% from yesterday’s lows indicating firm support in equities.

  • STOXX 50 (EU50.I) - while US equities were generally under pressure yesterday, we observe increasing strength in European equities which had a strong session yesterday. STOXX 50 is pushing again this morning and will likely try to re-test the 3,400 level within the next couple of weeks.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - need to consolidate following the three-week surge turned ugly yesterday when both markets collapsed by much more than would normally be expected during a normal correction. Gold dropped below $1920/oz, the previous high from 2011 while silver collapsed by 18% in just two days. While a small bounce in US real yields, a stabilizing dollar and raised vaccine hopes were the triggers, there is no doubt that a lot of hot money recently had rushed into the markets, especially into silver ETF’s. In our latest metals update from yesterday we highlighted the reasons for holding a long position in precious metals and these have not gone away. Having both corrected 50% of the June to August surge we think the sell-off has gone too far and a close today near the highs on both metals could potentially signal the early end of a very deep but needed correction.

  • Brent Crude Oil (OILUKOCT20) and WTI Crude Oil (OILUSSEP20) - remain hopelessly unable to find a break as they both remain rangebound. Yesterday’s weakness was driven by the general risk-off in response to rising bond yields and lack of progress on U.S. stimulus talks. The American Petroleum Institute reported a 4-million-barrel drop in crude stocks with surveys ahead of today’s EIA report looking for a 2.2-million-barrel drop.

  • NZDUSD fell against all its peers after the country’s central bank said it would boost its asset-purchase program while saying that negative rates remained in active preparation. The move came as the re-emergence of the coronavirus sent Auckland into lockdown. The Kiwi dropped below its 50-day moving average (MA) but once again managed to find support at 0.6530. A break could signal a return to the 200-day MA at 0.6370.

  • Tesla (TSLA:xnas) - announces a 5-for-1 stock split effective on 31 August as the recent rise in the share price has pushed the price to levels where retail investors are not able to participate. These splits tend to create momentum in the underlying stocks because it opens the opportunities for more investors. Shares were up 7% in extended trading on the news.

  • Moderna (MRNA:xnas) - the US biotechnology which is currently leading the race to find a vaccine against COVID-19 has reached a deal with the US government for 100 million doses worth up to $1.5bn. The deal is a pre-emptive move by the government to start production of promising candidates while they are still in trial. Moderna shares were up 10% in extended trading.

  • Asos (ASC:xlon) - the UK-based online fashion retailer announces this morning that it sees fiscal year sales and profit significantly ahead of view with revenue expected up 17-19% for the year and pre-tax profit around £130-150mn.

What is going on?

  • Traders have now removed expectations that the Fed will move towards a negative-rate policy. This after the whole Fed funds futures curve slipped back below 100 yesterday. Just a month ago the market was pricing in negative Fed funds from May 2021.

  • Joe Biden has chosen Kamala Harris as his vice-presidential nominee due to her experience in government as a California attorney general and US senator since 2017. She is also able to resonate with the younger voter segment including the Black and Hispanic voter segments. It is still too early to call how big the impact is on Biden’s chances to win the election in November.

  • Airbnb plans to file for IPO already this month in a surprising move as most market participants had expected the company postpone following the COVID-19 pandemic which have hit the travel segment hard.

  • Russia claims successful vaccine against COVID-19 with Putin grating regulatory approval and will start mass production in a few weeks. The Russians have shared very little information of the vaccine with other health organisations around the world so the uncertainty over its safety and effectiveness is very high.

What we are watching next?

  • WASDE on tap – The US Department of Agriculture will on today at 16:00 GMT issue its latest World Agriculture Supply and Demand Estimate. The report will contain the first survey-based yield estimate instead of the weather-adjusted yield models used in previous months. It is expected to show plentiful supplies of U.S. grains following a so far weather friendly growing season. Analysts see the corn yield at 180.5 bushels per acre (bpa) and the soybean yield at 51.2 bpa, which would be the highest and second highest yields reported by USDA in their August report.

  • US 10-year yield rose 6.6 bps yesterday causing havoc in gold and silver is now back in the driving seat and is pushing again today trading at 0.67% up from the lows of 0.51% on 4 August. As we have flagged in earlier research notes a big jump in interest rates is probably the biggest risk to the market, so it is important for investors to follow this closely in the coming days.

  • 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.

  • US July CPI numbers are out today with consensus looking for a decline of 0.1% m/m and rise of 0.3% y/y down from 0.7% y/y in June. Yesterday’s PPI numbers surprised to the upside indicating some signs of price pressure building in the supply chain which could ultimately feed through to consumer prices.

Economic Calendar Highlights for today (times GMT)

  • 0600 – UK Jul. Industrial Production
  • 0600 – UK 2Q GDP
  • 0730 – Sweden Jul. CPI
  • 0900 – Eurozone Jun. Industrial Production
  • 1230 – US Jul. CPI
  • 1230 – US Jul. Real Avg Hourly Earnings
  • During the day – OPEC's Monthly Oil Market Report

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