Market Quick Take - June 11, 2020
Chief Economist & CIO
Summary: The FOMC meeting yesterday was a mixed bag, largely seen as dovish for long term interest rates as the Fed pledged to continue expanding its balance sheet at the currently established pace, but had nothing to say on new policy initiatives like yield-curve-control. Risk appetite tried to stage a further rally over the meeting, but has consolidated overnight.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – the latest strong rally extension just after the FOMC announcement and Powell press conference late yesterday has been entirely erased overnight and then some, with the Nasdaq100 looking at the symbolic 10,000 level again this morning, while the S&P has suffered a more significant drawdown without posting a new high in the prior two days, unlike the Nasdaq 100 (yet another sign of strong divergence as tech megacap names lead while smaller stocks languish).
- OILUSJUL20 (WTI Crude Oil) - cracks in the oil market recovery was seen again yesterday after US stocks hit a 538-million-barrel record. This during a time where production has been cut by 2 million barrels/day. It supports our view that oil needs to consolidate with the risk of a minimum correction lower towards $35/b. Stocks are rising as demand for fuel continues to recover only slowly while abandoned storage plays add extra barrels through rising imports.
- JPY crosses (AUDJPY, NZDJPY, CADJPY, EURJPY – the strong reaction in the US treasury market to the Fed’s message yesterday and a consolidating equity market are fuel for a broad JPY rally. If the lower US yields coincide with a further general bout of safe-haven seeking here, the JPY will likely strongly outperform versus smaller currencies, keeping USDJPY somewhat rangebound as the USD is likely to as the USD will also likely trade firmly – so the focus for more potential JPY strength for the moment is in the crosses.
- AUDUSD – the AUDUSD managed to post a very marginal new high over the Fed meeting on broad US dollar selling, but now look set for a potentially larger consolidation lower after the incredibly persistent rally of the last couple of months, provided risk appetite is also in for a round of consolidation. A retracement to the 0.6800-0.6750 area is a modest consolidation scenario, while the 0.6675 area was a focus on the way up and the 200-day moving average.
- CORNJUL20, SOYBEANSNOV20 and WHEATJUL20 - The US Department of Agriculture is due to release its monthly global agriculture supply-demand report (WASDE) later today at 16:00 GMT, the report often creates volatility and traders should be aware. The market has already priced in a heavy supply outlook, particularly in the U.S. Corn already trades at the lowest for this time of year in at least ten years while soybeans traders hope Chinese demand will save the day. This following a string of purchases of U.S. soybeans recently.
What is going on?
- The new FOMC statement pledge to maintain the current pace of QE. The expressed intent to maintain the pace of purchases was the key change to the latest FOMC policy statement, which otherwise contained few changes and is seen as relatively dovish, given a strong tapering in the pace of Fed asset purchase over recent weeks. The accompanying economic and Fed policy projections were not given much focus, but suggest that the Fed doesn’t see the economy entirely returning to its pre-crisis levels until well into 2022, while the majority of the policy forecasts look for a policy rate of zero through 2022. There was one last burst higher in late trading as the very last question at Fed Chair Powell’s press conference dealt with the risk of asset bubbles, with Powell essentially saying that the Fed is focusing on financial conditions for the economy and not the levels of asset markets.
- US May CPI came in lower than expected, with the Headline CPI at a mere +0.1% year-on-year, the lowest since 2015, while the “ex Food and Energy” measure came in at 1.2%, the lowest since 2011. While we all know that a collapse in oil prices and demand shock will drive deflationary effects in the near term, the question further out will be whether the eventual supply shock and stimulus efforts drive a notable rebound and even the risk of inflation running hot.
What we are watching next?
- Important EU summit next week - the EU Council meeting next week gives us the next impression on how united the front is on the new EU framework for responding to the Covid19 crisis. Already, pockets of resistance to the EUR 750 billion package are emerging, from Austria to Netherlands, Denmark and Sweden.
- Post-Brexit negotiations incoming - these are set to grab more headlines in the weeks to come as negotiations for the terms of trade are set to resume and will affect the prospects for sterling, with any sense that the EU will continue to take a tough line with the UK, together with any sense that the BoE is still looking at taking policy rates negative possibly driving further GBP weakness.
- Covid19 risks – reports on second wave outbreaks continue and could reach a tipping point for market awareness if some US states are forced to restrain activity again. Mexico and India, among other developing economies, are also hotspots and seem to have taken the approach of lifting lockdowns to prevent economic harm, even as Covid19 spreads.
Economic Calendar Highlights (times GMT)
0730 – Sweden May CPI
1230 – US May PPI
1230 – US Weekly Initial Jobless Claims
1430 – US Weekly EIA Natural Gas Storage