Market Quick Take - October 22, 2020

Macro 6 minutes to read

John Hardy

Head of FX Strategy

Summary:  Yesterday saw the US market trying to rally on stimulus news before fresh doubts cropped up, while markets were spooked overnight by US accusations Russian and Iranian meddling in the US election. Things look friendlier in Europe, where the EU and UK are set to resume Brexit talks. The Chinese currency had its weakest session in eight days overnight after a sharp run higher.


What is our trading focus?

  • Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities are perched near pivotal levels after (so the story goes) the accusations of Russian and Iranian meddling in the US Election and concerns that a US stimulus effort may be left hanging on key votes to take place after Election Day on the Tuesday after next (3 November). For the Nasdaq 100 Index, the downside pivot zone is the 11,500-600 area and for the S&P500, the key 3,400 area has come into view overnight. A break of these levels could set the focus lower toward the September lows.

  • Bitcoin (BITCOIN_XBTE:xome) rocketed higher yesterday by nearly 1,000 dollars yesterday - and traded above 13,000 overnight briefly and thus at its highest level since the late 2017 spike.

  • USDJPY and EURJPY – the JPY suddenly came alive yesterday on no readily identifiable catalyst as the JPY played a bit of catchup with the euro in rising versus the US dollar. The price action took USDJPY well back below 105.00 yesterday, a level that has not survived the last six attempts to break for more than a week or so, stretching back to 2016. EURJPY sold off yesterday as well after a sharp rise in the previous two sessions. It is worth noting that in recent years, the JPY and USD tend to correlate in the crosses (i.e., if EURJPY rising or falling, EURUSD does likewise) – so it would be unusual if the USDJPY pair continues to see the highest beta to JPY direction here – another session or two of observation needed, but the technical trigger of the drop below 105.00 in USDJPY should have JPY traders on edge.

  • EURGBP and GBPUSD – the sterling reversed back to the strong side as the UK and the EU sit down to resume talks. Sterling is likely to head stronger still if the two sides can reach a sufficient level of agreement to “enter the tunnel” of final negotiation details – a signal that a “No Deal” scenario is off the table. This type of announcement could come anytime between now and mid-November and see an additional jolt of GBP strength. The focus in EURGBP is on 0.9000 and in GBPUSD If the USD continues weaker here while GBP rallies, the focus will quickly shift to the massive 1.3500 char level now that local resistance above 1.3000 has been broken.

  • Thirty-year Treasury yields (30YUSTBONDDEC20) tried resistance line at 1.65% and retreated - The US Treasury yield curve flatten slightly yesterday as the auction of 20-year Treasuries received good demand and priced better than Initial Pricing Guidance (IPT). This might be because although the FED bond purchases in the long part of the yield curve are limited, higher yields mean an increase in accommodative measure. The market is expecting the FED to increase purchases of long bond maturities.

  • Italian BTPs (10YBTPDEC20) are falling amid a second wave of coronavirus. Italy recorded the highest number of coronavirus cases during the day of yesterday, and the government is imposing more restrictions in order to curb the spread of the infections. Italian sovereign yields rose lead by long maturities. This might be a buy opportunity, as the ECB prepares with more support that could push BTPs higher.

  • Tesla (TSLA:xnas) - shares were 3% higher in extended trading on Q3 earnings beating estimates. Revenue was $8.77bn vs est. $8.26bn and adjusted EPS was $0.76 vs est. $0.55. Tesla reiterated their 500,000 target for 2020 and hinted on the earnings call that 850,000 cars next year was possible. The energy & storage segment was a big positive surprise and indicate that this part of the business will add significantly to growth over the coming years. Operating cash flow over the past 12 months rose to over $4bn with free cash flow hitting $2bn over the same period. With $14.5bn in cash and equivalents Tesla has more than enough capital to deliver on strong growth in the coming years.

  • Snap (SNAP:xnys) - shares were up 28% yesterday on strong earnings lifting other online advertising stocks such as Facebook, Google, Twitter and Pinterest. Q3 revenue was $679mn vs est. $559mn and the company will definitely break-even on a cash flow basis within the next two quarters.

  • Gold (XAUUSD) and silver (XAGUSD) has reversed lower overnight after the US election meddling accusations helped strengthen the dollar along with reduced prospects for a stimulus deal before the November election. Having failed to break above $1933/oz, gold remains stuck in a range with strong support in our opinion being the trendline from the September low at $1900/oz. Silver meanwhile has enjoyed the tailwind from rallying industrial metals, now fading with LME Copper struggling to break above $7000/t.

  • Brent crude oil (OILUKDEC20) & WTI crude oil (OILUSDEC20) reversed lower yesterday after EIA’s weekly inventory report showed a surprise jump in U.S. gasoline stockpiles and slowing demand. While some of it was due to Hurricane Delta, the market overall remains troubled by a resurgent coronavirus raising concerns about demand, as mobility is being restricted, at a time of rising supply from Libya and a potential but now doubtful increase from OPEC+ from January. WTI trades back below $40/b while Brent will be looking for support at $41.20/b followed by $40.60/b.

What is going on?

  • US officials warned that Russia and Iran are trying to interfere in the US election - the officials said that Iran and Russia have acquired voter registration information, which could be used in misinformation efforts. Specifically, the US director of national intelligence accused Iran of already having sent threatening emails.

  • The EU and UK are set to resume talks today in London – this announcement suggests that the EU side has sufficiently changed its negotiating position (Barnier made overtures yesterday of emphasizing the UK’s sovereignty) for Boris Johnson to agree to resumption of talks after suspending them late last week. Sterling is sharply stronger in anticipation of a breakthrough.

  • Commodities are heading for a structural bull market in 2021 according to a research note from Goldman Sachs. Despite a short-term drop in demand as winter exacerbates the Covid-19 impact, they mention three main drivers including 1) structural under-investment in the old economy, 2) policy-driven demand and 3) macro tailwinds from a weaker dollar and rising inflation risks. They see almost all raw materials, apart from iron ore, coffee and cocoa, moving toward supply deficits.

What we are watching next?

  • US stimulus package status? This issue continues to hang over the market with little change and little understanding of how many Republicans would support a larger package, with Senate Republican leader issuing a constant stream of criticism against a deal while the statements from Democratic House Speaker Pelosi and US Treasury Secretary Mnuchin remain cordial. Time for getting stimulus done has slipped to the extent that the final votes may not be able to happen until after Election Day – a prominent risk if the election is contested.

  • Brexit breakthrough next week or not until mid-November and what about Covid? - the resumption of talks is a strong signal that the UK and EU may be able to find sufficient common ground and soon. The market may find it sufficient that a headline agreement of principles has been found and that the two sides are “entering the tunnel” to hash out the details for the coming weeks. Lurking at the periphery of traders’ attention should be the impact of Covid-19 on the UK’s economy, which has been devastating and the fiscal impulse is fading and may not revive much over the winter beyond extensions of programmes for the worst-hit in the economy.

  • Turkey’s central bank set to announce its interest rate decision today - with divided opinion on how much the central bank will hike rates after hiking 200 basis in September, but the average of consensus is that the bank will go +175 basis points to a key rate of 12%. The Turkish lira fell from around 7.0 to the US dollar in August to nearly 8.0 last week before rising slightly this week. This weak performance came despite an environment of a fairly weak US dollar and generous risk sentiment toward EM as the Turkish sovereign and Turkish corporates struggle to regain trust with foreign creditors.

  • Second and final US Presidential Debate tonight in the US
  • US Q3 earnings season continues and picks up this week: Intel (today), Coca-Cola (today) American Express, Hermes International (today), Daimler, Kweichow Moutai.

Economic Calendar Highlights for today (times GMT)

  • 0730 – Sweden Riksbank to publish business Survey
  • 0925 – UK Bank of England Governor Bailey to Speak
  • 1100 – Turkey One-week Repo Rate
  • 1230 – US Weekly Initial Jobless Claims and Continuing Claims
  • 1400 – Euro Zone Oct. Consumer Confidence
  • 1400 – US Sep. Existing Home Sales
  • 1430 – US Weekly Natural Gas Storage Change
  • 1500 – US Oct. Kansas City Fed
  • 1500 – Norway Norges Bank Governor Olsen to Speak
  • 2145 – New Zealand Q3 CPI
  • 2330 – Japan Sep. National CPI
  • 0030 – Japan Flash Oct. Manufacturing/Services PMI
  • 0100 – US Final Presidential Debate between Joe Biden and Donald Trump

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