Market Quick Take - September 24, 2020
Head of FX Strategy
Summary: Risk sentiment has cratered badly since early yesterday in the US, with the broader US market closing down some 2.4% in the cash session and slightly weaker still overnight as the bad mood spread to Asia overnight. The root of the concern appears in part linked to the lack of US stimulus. The US dollar continued strengthening, tightening global liquidity, and precious metals settled sharply lower.
What is our trading focus?
S&P 500 Index (US500.I) & NASDAQ 100 Index (USNAS100.I) – the broad US market was in for a thorough drubbing across the board, with the S&P500 down some 2.4% and the Nasdaq 100 down over 3%. The Nasdaq 100 resistance was found near the 61.8% retracement of the recent sell-off (near 11,200), while the S&P 500 faded right at the converging 21-day and 55-day moving averages. The scale of yesterday’s sell-off has both of the indices trading near the recent lows – with the S&P500 trading below the Monday low of 3,217 overnight and the Nasdaq 100 not far from its own recent low of 10,656. The 200-day moving average comes to mind as the next potential testing zone lower if the S&P500 continues to sell off. It is currently just below 3,100.
STOXX 50 Index (EU50.I) – European equities tried to stage a stronger bounce yesterday than the previous day, perhaps in part encouraged by the weaker Euro, but the weight of negative sentiment later in the session globally – particularly in the US – dragged the major indices like the STOXX 50 back lower, only to close near the lows of the session, with the recent low from Tuesday at 3,137 falling this morning in pre-cash session futures trading.
Spot Gold (XAUUSD) & Spot Silver (XAGUSD) - continued lower overnight as both metals and commodities in general are struggling to put up a defense against a dollar on course for the strongest week since April. Real yields have move higher as inflation expectations have eased but overall the changes have not led to a revision in our bullish house view. Looking for selling to fade ahead of $1837/oz, the 38.2% retracement of the March to August rally. Once again silver has been left hopelessly exposed and after only a brief stop at $22.90/oz it continued lower with the next major level of support being $20.75/oz.
WTI Crude Oil (OILUSNOV20) & Brent Crude Oil (OILUKNOV20) - both trades lower following warnings over global energy demand and the state of the U.S. economy at a time where political infighting has left Washington paralysed. A price supportive drop in US gasoline and distillate stocks had limited impact with the general reduced level of risk appetite currently unfolding. A monthly survey from the Dallas Fed found that most US producers needed WTI above $50 before substantially increasing the number of oil rigs. WTI looks vulnerable below $39/b while a break below $41/b in Brent could signal a renewed test of the recent lows around $39.30/b.
EURUSD & AUDUSD – big breaks yesterday for these two important USD pairs. While the EURUSD has more space to run without upsetting the larger scale bull trend – the 1.1500 area is the mission critical area for bulls – the situation for AUDUSD is somewhat different as the pair will soon run into a pivotal area around 0.7000 if the selling continues. The Aussie is rather weaker in this environment as a traditionally pro-cyclical currency. Below 0.7000, the next support is perhaps the 200-day moving average currently near 0.6775.
USDJPY and JPY crosses – USDJPY has now rallied into the last shreds of resistance after its recent sell-off, even if the JPY is still relatively strong in the crosses (AUDJPY continues to post new lows and has correlated well with this recent risk sentiment drop). If the USDJPY tarries here above 105.00, we can begin to describe the situation in currency markets as mostly one of King Dollar.
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iShares iBoxx USD High Yield Corporate Bond Fund (HYG:arcx). Investors continue to pull money from riskier assets adding pressure to junk bonds. During the day of yesterday we have seen for the first time since July a US junk bond deal being pulled from the market. We believe it is time to select risk carefully.
What is going on?
Lack of visibility on further stimulus has Fed officials sounding the alarm. In addition to the resurgence in virus cases weighing on sentiment (perhaps adding to this, a study in Houston showed some mutations may be making the virus far more contagious). Over the past 24 hours we have seen Fed Chair Powell weighing in on the risk to the economy on the slowing of fiscal stimulus and three regional Fed presidents were out expressing strong concern. Influential Fed Vice Chair Clarida was out in an interview saying that “the economy is recovering robustly, but we are still in a deep hole”.
US earnings today – Costco (COST:xnas), Trip.com (TCOM:xnas) and Accenture (ACN:xnys). While Costco today is interesting from a US consumer spending angle and Accenture from IT services spending from enterprises, the Trip.com offers the most exciting information from a macro perspective. Numbers and sentiment in China have been better relatively to the US and Europe as the fight against COVID-19 seems to have been more successful and thus allowing for a quick economic rebound. Trip.com is China’s largest online travel agency and thus provides colour on the Chinese consumer and their willingness to spend on travel.
Flash September PMIs show EU services sector slipping back into contraction. New Covid measures and changed behaviour saw the flash Euro Zone Service PMIs for September showing a contracting services sector in France, Germany and the Euro Zone as a whole. This contrasts with readings well over 50 for the UK (55.1) and the US (54.6), although heightened recent concer nin the UK could drag down the final reading for the month.
What we are watching next?
EM currencies - the weakness in EM FX has ramped sharply higher in recent days, a sign of more global weakening in risk sentiment and possibly a link to the reduced USD liquidity story risks from lack of stimulus. Among the weaklings is the Ruble, which hit new lows versus the USD yesterday since this spring, and the Turkish lira, which has been grinding lower for the last five sessions running. The Turkish Central Bank meets today to set its policy rate and may need to hike rates more than expected to slow the lira’s decline. Mexico’s central bank is also to meet late today and was expected to cut rates, but may choose a different path given market volatility and a sharper weaker MXN.
Economic Calendar Highlights for today (times GMT)
0730 – SNB Meeting
0800 – Germany Sep. IFO
0800 – ECB Publishes Economic Bulletin
1100 – Turkey Central Bank Rate Announcement
1230 – US Weekly Initial and Continuing Jobless Claims
1250 – US Fed’s Kaplan (Voter) to speak
1300 – ECB Chief Economist Lane to Speak
1400 – UK BoE Governor Bailey to Speak
1400 – US Fed Chair Powell and Treasury Secretary Mnuchin to Testify
1400 – US Aug. New Home Sales
1430 – US Weekly Natural Gas Storage
1600 – US Fed’s Bullard (and two other non Voters) to speak
1800 – Mexico Central Bank Rate Decision
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