Market Quick Take - August 7, 2020

What is our trading focus?

S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – strong new highs for the cycle yesterday in Nasdaq 100 and S&P 500 that were only spoiled in late hours by US President Trump’s ban on TikTok and WeChat (see below). The VIX closed at a new low yesterday below 23 for the first time since February, suggesting that traders are becoming increasingly complacent and willing to sell volatility.

German DAX (DAX.I) - despite the US indices’ march to new highs for the cycle, the technical situation for major European indices remains in limbo, especially after yesterday’s weak session in Europe, where in the case of traders’ favourite the German Dax, new local highs were rejected and the index closed a percent lower despite the strength in equities across the pond. One factor likely holding European equities back is euro strength, as the recent consolidation proved very brief before the currency head back toward the 1.1900+ highs in recent sessions.

Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - new highs for both metals yesterday as gold extended above 2,050 and silver vaulted almost to 30 dollars per ounce overnight before both metals corrected a bit in Asian trading hours – as usual, far more so in the choppy silver price action. The momentum of this rally has reached white knuckle levels, suggesting that we may be near a temporary climax in the price action and the risk of two-way price action could be growing.

Brent Crude Oil (OILUKOCT20) and WTI Crude Oil (OILUSSEP20) - we continue to watch the price action for a status check heading into the weekend, as Brent has been unable to sustain price actino above the key 45/barrel level, though it hasn’t yet reversed with conviction either, while the WTI price action looks a bit more shaky back below the former range top of 42.50

USDCAD – this USD pair has stolen a bit more of the spotlight as the pair has backed up into – and even above at times – the important 1.3300-50 level that was a well-established pivot zone on the way down recently. There is little confirmation elsewhere from the US dollar that it is about to turn higher and the pair still needs to stick a close back toward 1.3450 to suggest a bullish reversal, but we will watch the weekly close with interest and CAD traders should also keep an eye on the finely balance technical situation in oil prices (see above).

EURUSD – the USD is poised near the cycle lows and EURUSD near the cycle highs, but if USD liquidity is meant to be a key input into the “everything bubble” as investors fear that endless stimulus will feed negative real rates, particularly for the US, the USD is not contributing much to this latest wave. Still, no signs of trouble for EURUSD bulls here save for some minor momentum divergence that would be quickly removed if the pair can pull out a strong weekly close. A weak close on the day, on the other hand (US-China concern/stimulus concern/simple consolidation of equity market, etc.), could set up a bearish weekly candlestick that suggests consolidation risk to 1.1625 (the 38.2% retracement of the latest strong rally wave in July).

Tencent (700:xhkg), Electronic Arts (EA:xnas) and Activision Blizzard (ATVI:xnas) - shares are down 5% but was down as much as 10% during the session in Hong Kong as the Trump administration bans Tencent’s WeChat in the US following the recent ban of TikTok that is still struggling to find a buyer. This has potential ramifications for US companies as China is most likely planning a countermeasure that could hit certain companies within gaming. Electronic Arts and Activision Blizzard are the two most vulnerable companies to this scenario.

Booking (BKNG:xnas) - reported Q2 revenue last night of $630mn down 84% y/y but beating estimates of $ 569mn – shares jumped 4% in extended trading. The Q3 is seasaonally the strongest quarter during the year and with the latest resurgence of COVID-19 cases this will be a crucial quarter in terms of investor sentiment in the short-term. Management says that they have seen improvements since April in line with easing of restrictions across many geographies. Newly booked room nights are only down 35% y/y in July giving a clearer picture of actual demand drop in a world with moderate restrictions and no vaccine.

Uber (UBER:xnys) - Q2 earnings last night after the close showed a 75% decline in mobility bookings to $3.05bn missing estimates while delivery bookings rose 106% y/y to $7bn beating estimates - shares were down 3% in extended trading. Adjusted EBITDA was $837mn, a bit better than expected, with management reaffirming that it become profitable by end of 2021 on this adjusted measure. The fact that management reaffirms this forecast with such an uncertain outlook for mobility underscores the pressure on Uber to maintain the narrative of profitable just around the corner. We remain of the view that this is not feasible by end of next year and shareholders will continue be disappointed over the lack of profitability.

What is going on?

US President Trump bans TikTok and WeChat in the US - The two companies must cease operations in the US in 45 days, after which no US individuals or businesses are allowed to do business with the companies. The TIkTok ban was largely expected, but the move against WeChat as well spooked markets and particularly Tencent, the Chinese parent company of WeChat.

Signs of ZAR weakness, perhaps on recent TRY declines – USDTRY traded to a record high above 7.25 yesterday and other EM currencies are somewhat weaker, if in orderly fashion. One exception is ZAR, where the country’s precarious financial situation echoes that of Turkey’s in many ways (weak credit rating, external deficits, etc.). Concerns could also rise as July data showed that non-residents are losing interesting in the country’s bonds, with non-resident holdings dropping to 30.1% from 37.3% in January. USDZAR is near a high since May at 17.50, while EURZAR challenged all time highs near 21.00 yesterday.

Lowest US weekly initial jobless claims since March – the market is concerned that the virus resurgence in the US has weakened the labour market, as seen in a very weak employment sub-index in Wednesday’s July US ISM Services index and a small payrolls gain in the July ADP private payrolls numbers, but the claims yesterday were a bright spot, with initial claims at 1.19M vs. 1.4M expected and continuing claims dropping almost 850k to 16.1M from 16.95M

LG Chem says that it expects battery business to double by 2025 in a sign of strong demand for batteries driven by growth and adoption of electric vehicles. The company says there are no outstanding issues or bottlenecks in the supply chain related to batteries. LG Chem expects $11bn in revenue from batteries this year rising to $25bn in 2025. Its shares are up 130% this year.

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 yesterday, with description of the talks suggesting the two sides remain far apart. Meanwhile, US President Trump may be launching a gambit to make it appear that he is in control of the situation by issuing a series of executive orders to bring new relief, including a temporary extension of the weekly unemployment benefits and a possible suspension of payroll taxes.

US July jobs report and whether the market even cares – there seems to be an underlying assumption that the current state of the economy is irrelevant and perhaps even that exceptionally weak data simply means that the stimulus to counter any weakness will be that much bigger, meaning we should all buy stocks and gold to escape the implications of increasingly negative real rates.

Election in Belarus this weekend – the incumbent Lukashenko is likely set to win the election after he mobilized efforts to take down opposition candidates’ ability to run and the elections may be rigged anyway. But he is dealing with record protests on the home front against his rule, while also resisting Russian efforts at a closer relationship with Moscow – the situation could prove highly charged for the Russian ruble if Belarus suffers any wider destabilization post-election on protests over mis-managed elections and the risk of Russian involvement.

Economic Calendar Highlights for today (times GMT)

1230 – Canada Jul. Net Change in Employment / Unemployment Rate

1230 – US Jul. Change in Nonfarm Payrolls

1230 – US Jul. Unemployment Rate

1230 – US Jul. Average Hourly Earnings

1400 – Canada Jul. Ivey PMI

1400 – US Fed’s Rosengren (Non-voter) to testify on the Fed’s Main Street Lending Program