Market Quick Take - August 17, 2020

Macro

Ole Hansen

Head of Commodity Strategy

Summary:  Last week ended with US equity markets perched near the top of the range, while European indices were a bit wobblier int the close of the week. This week we look forward to the US political season heating up with the Democratic Convention starting today as accusations swarm that President Trump is attempting to sabotage the election by disrupting the postal system.


What is our trading focus?

  • S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – US equity futures are slightly higher in early session despite a mixed Asian session impacted by rising new COVID-19 cases in various countries including South Korea. S&P 500 futures have been trading a narrow range the past three sessions with the 3,350 level as the obvious support area and 3,380 as the key resistance level.

  • STOXX 50 Index (EU50.I) - European equities are under pressure this morning as the EUR continues to strengthen with several industry associations across the continent saying it is putting pressure on export-driven companies. The first support level in STOXX 50 is around 3,269 so traders should watch this level today if tested.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - have both ticked higher this Monday with the dollar and bond yields both trading softer. Silver currently trades within a wide $26 to $27.5 range. Last week's rise in U.S. bond yields helped drive a drop in speculative longs in both metals to an eight-week low. While still a potential concern from a bullish perspective, the rising volatility in gold futures spreads and the dislocation to spot gold traded in London have been cited as reasons why funds have moved long exposure from COMEX gold futures into Exchange-traded funds instead. Focus this week will be on whether bond yields manage to stabilize, FOMC minutes and the dollar, which trades weaker this Monday.

  • Brent Crude Oil (OILUKOCT20) and WTI Crude Oil (OILUSSEP20) - remain stuck in a tightening range with the caution being expressed in key oil market reports last week being offset by signs an energy demand recovery in the U.S. is gaining traction. On the other hand, declining refinery margins due to bulging stocks of diesel and gasoline could trigger rising crude oil stockpiles into September. Focus on OPEC+ as they meet on Wednesday to discuss the latest market developments. For the past nine days, WTI crude oil has touched, but not yet closed above its 200-day MA, today at $42.65/b while the 50-day MA provides support at $40.20/b.

  • USDJPY last week, USDJPY completed a reversal of the prior breakdown below the 106.00 area and is back in the technical limbo between 106 and perhaps 110.00. The clear driver of this reversal was the backing up of long yields in the US, a development that bears close watching this week as we highlight below. If yields continue to rise without triggering excessive volatility across assets, USDJPY could work sharply higher, while if yield rises bring concerns that long rates will impact the narrative on how the multiples for risky assets are priced, USDJPY may have a tougher time heading higher.

  • EURUSD the suspense for EURUSD traders continues this week as last week saw no resolution, with the bulls unable to take the 1.1900 area to the upside and likewise, the 1.1700 area holding as support. The latest US futures positioning data shows another record net speculative long of 200k contracts, a warning sign that additional upside for EURUSD may prove tough going. Economic data is rarely a major catalyst these days, but the most interesting macro data this week are the regional manufacturing surveys today (Empire) and Thursday (Philly Fed) as well as the latest jobless claims data from the US, also on Thursday and the flash PMI’s out of Europe this Friday.

What is going on?

  • Berkshire Hathaway (BRKA:xnys) added shares in Barrick Gold (ABX:xtse) worth $563 million according to 13-F filings released Friday afternoon. Warren Buffett has long been critical of gold as an investment and the move was by some taken as a sign that he is signalling a shift in his views on the market. Potentially a move to hedge against future inflation or potentially just a move into a stock that pays a dividend compared with the banking stocks he sold.

  • OPEC+ monitoring committee will meet on Wednesday to assess the state of the market. Once again comments from Russia and Saudi Arabia will be watched closely, especially with regards to those members still struggling to deliver the promised production cuts.

  • Biden is rumoured to announce a big climate policy push this week at the Democratic party convention earmarking $2trn in spending over the next four years. A Biden administration will likely mean the US will return to the Paris climate accord and energy policies to protect the environment rolled back under the Trump administration will be reinstated. Biden will be negative for the oil and gas industry and very positive for the green energy industry.

What we are watching next?

  • Government bond yields – we continue to watch government bond yields, especially at the long end of the curve, after last week’s strong uptick in yields. A persistent rise in yields would begin to test the narrative driving risky assets higher as valuation models would require a repricing lower on a sizable yield rise. At what yield level, for example on the US 10-year benchmark, this would begin to increase volatility and impact other markets is unknown, but there is likely some link in last week’s rise in yields with the volatility in precious metals markets. The post COVID-19 panic high in the US 10-year benchmark was 95 basis points, versus the current level near 70 bps, and the low earlier this month near 50 bps, so focus on yields would likely intensify at around 100 bps for this benchmark.

  • US Democratic conventions starts today - it's not much of a convention, given the limitations imposed by COVID-19 in the US, but the Democratic convention starts today and runs through Thursday. Most polls suggest the Biden/Harris ticket has a commanding lead in the polls, even if Dems may have concerns about voter enthusiasm for the ticket. As well, US President Trump’s new postmaster general has reduced funding for the postal service in a clear bid to sabotage the US election and will be called to testify before Congress this week.

Economic Calendar Highlights for today (times GMT)

  • 1230 – US Aug. Empire Manufacturing Survey
  • 1300 – Canada Jul. Existing Home Sales
  • 1400 – US Aug. NAHB Housing Market Index

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