25riskM

Market Quick Take - August 18, 2020

Macro

Summary:  Equity markets posted another quiet session yesterday, with the S&P 500 once again just failing to close at a new all-time high, while the Nasdaq 100 did manage to do so, perhaps helped in part by a weaker US dollar, where EURUSD is poised near the pivotal 1.1900 level. The action in Europe yesterday and Asia overnight was less buoyant, but gold and silver are making a strong bid for a comeback.


What is our trading focus?

  • S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – another quiet US equity session ended in modest gains for the broad indices, still slightly short of all-time highs in the case of the S&P500 index, while the Nasdaq-100 index managed to scrape to a new record. The VIX settled lower to its lowest post-crisis close below 21.50 as complacency continues to growth with the modest trading ranges.

  • STOXX 50 Index (EU50.I) – the strong euro/weak US dollar is likely a key factor in keeping European bourses from mimicking developments in the US, and the focus on the strong euro could escalate further if EURUDS pulls above recent highs above 1.1900 and challenges above 1.2000. Technically, the focus for the STOXX 50 is on the 200-day moving average that the index has been interacting with since early June – currently at 3,328, while the recent pivot high is up at 3,377.

  • Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - once challenging $2000 and $28 with the risk of profit taking subsiding with bond yields turning lower while the dollar trades weaker, especially against the euro where much of the attention currently lies (given the record EUR long in futures). Also supporting the market are geo-political tensions between China and U.S. (see Huawei below) as well as the so-called Buffett bounce, after Berkshire Hathaway announced they had bought shares in Barrick Gold. Both metals have now retraced more than 61.8% of last week’s correction, thereby increasing the potential for higher prices, somewhat sooner than expected. Minutes from the Fed’s July meeting will be issued tomorrow, and the market will be looking for clues on its next steps in terms of providing accommodation.

  • Brent Crude Oil (OILUKOCT20) and WTI Crude Oil (OILUSSEP20) - trade near and at a five-month high with WTI finally managing to close above its 200-day moving average yesterday. No follow through reaction in terms of additional buying has been noted so far. Overall, the market is trading on an ‘economic recovery leading to stronger demand’ narrative. A falling number of Covid-19 cases in the U.S. may further support a recovery in fuel demand from the world’s biggest consumer. Focus on the OPEC+ groups Joint Market Monitoring Committee (JMMC) as they meet on Wednesday to discuss the latest market developments. Expectations are that they will leave production as is but reinforce the message about compliance and group discipline. Brent at $45.3 continues to trade between its 50 and 200-day moving averages.

  • USDJPY – the yen is on the comeback trail, perhaps in part on the fading US yields at the long end of the curve after a spike last week. This comes after a strong attempt at a bullish reversal, which is now struggling as a throwback sell-off is now challenging retracement levels back below 106.00. Technically, a fuller breakdown threatens if the 61.8% retracement of the rally wave from below 104.50 to 107+ at 105.28 fails, even if arguably, the psychological 105.00 level is perhaps more important.

  • EURUSD – EURUSD continues to creep higher, prompted chiefly by a broadly weaker US dollar. The pair finds itself near the pivotal 1.1900 area this morning as traders will quickly eye 1.2000 on a break, a level that last traded in early 2018.  The going beyond that level, if the market can take it there, may be hampered in part by positioning, as the US futures market shows the most stretched long speculative positioning at +200k lots, in its history.

  • BHP Group (BHP:xlon) - the world’s largest mining group reports fiscal year results in line with estimates helped by higher iron ore prices. Management signals capital expenditures around $6.3bn in FY21 which is a third of the level back from 2013 indicating miners holding back on expanding supply. The new CEO is also indicating that the mining group will exit its coal operations and will dramatically reduce oil and gas assets over the coming years in order to get a greener footprint in the mining operation. The coal and petroleum segments are combined 24% of the total business. Shares are down 0.5% in Australian session.

  • Tesla (TSLA:xnas) - shares rose another 11% yesterday taking the share price to an all-time closing high of $1,835.64 translating into a market value of $342bn significantly exceeding number two in the car industry Toyota with its $222bn in market value. Yesterday’s gains in Tesla shares catapulted Elon Musk to become the fourth wealthiest individual in the world. Tesla shares are up 339% this year and yesterday’s move happened on no news. The valuation combined with the capital requirements, and the nature of the rise in its share price makes the stock extremely high risk for a setback and we want to warn all investors of participating in this frenzy without strict risk limits. Nothing warrants the doubling of the share price since late June.

  • JD.com (JD:xnas) - shares were up 8% yesterday on Q2 earnings showing CNY 3.51 vs est. CNY 2.71 driven by strong uptake in activity with mobile daily active users up 40% y/y in June. Revenue beat by 5% against estimates highlighting the rebound in China’s economy and JD.com's resilience to the ongoing tensions between the US and China.

What is going on?

  • US President Trump took further aggressive action against Huawei which some see as an attempt to kill the company, as the new measures mandate that no company can sell Huawei any technology “where US software or technology is the basis for a foreign produced item”, even as an intermediary supplier. Some suggest that Huawei could yet gain access through licenses in a new US-China trade deal round, but this move is a significant escalation against the company and will provoke an inevitable Chinese response.

  • Germany recorded its highest COVID-19 case count in four months - through Tuesday morning, the country reported a daily case count of almost 1,700, the highest since April as the country’s health authorities said that the infection rate remained above 1.0. France was reporting north of 2,500 cases per day in recent days, a number that dropped sharply yesterday to under 500. Similarly, Spain reported over 5,000 cases per day several times last week, but less than 2,000 yesterday.

  • Marks and Spencers set to reduce headcount by 7,000 over next three months – the UK retailer could be a typical story for this recession, a company that initially did little to assess the initial impact of the crisis, but now had time to assess the longer term implications of the outbreak to slim down operations.

  • On the first night of the Democratic National Convention much of the attention was on Michelle Obama’s speech and her declaration that Trump is unfit for office and is trying to disrupt the 2020 election with attacks on the funding and operations of the US postal system.

What we are watching next?

  • US treasury yields – the last couple of sessions have eased the focus on US yields as the surge in, for example, the US 10-year yield from last week has now eased back several basis points from last week’s peak. If yields do begin to rise again, starting with a move above 75 basis points, the impact would likely most quickly be felt in precious metals, if last week’s inter-market moves are any guide. US macro data in focus in coming days include Thursdays jobless claims and Philly Fed manufacturing survey after yesterday’s US Empire Manufacturing Survey disappointed with only a slightly positive reading.

  • US Democratic conventions continues through Thursday - with at least one poll from CNN showing a sharp narrowing of Biden’s lead over Trump in the polls, the polls bear watching over the next week or so to see if the Democrats are getting any convention-inspired surge or the opposite in the polls.

Economic Calendar Highlights for today (times GMT)

  • 1230 – US Jul. Housing Starts and Building Permits

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