Market Quick Take - June 18, 2020
Chief Economist & CIO
Summary: Yesterday saw a muted session in equities as new local highs in the US did not hold in most places and saw some gentle further consolidation lower in Asia that likewise failed to hold into early European hours. Safe haven fixed income has perked up overnight and the JPY did at times as well, but jumpy market action makes sustaining a narrative difficult.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – US equities continue to see notable divergence, with the S&P500 rather weaker than the Nasdaq100 and dipping back below the major 61.8% Fibonacci retracement level at 3,107 yesterday, while the Nasdaq 100 index failed to maintain above 10,000 into yesterday’s close. Significant weakness only in evidence if the S&P 500 closes back below perhaps the 3,011 200-day moving average, while for the Nasdaq 100 index, the first sign of technical weakness could be a close below the 21-day moving average (currently near 9670) that was avoided at the beginning of this week.
- OILUSJUL20 (WTI Crude Oil) and OILUKAUG20 (Brent Crude oil) - remain rangebound within an established five-dollar range. Positive comments from OPEC on supply discipline and Trafigura on rising demand are currently being offset by rising US stockpiles as well as virus worries in the U.S. and China. We maintain skeptical about crude oil’s short-term ability to move higher with virus related demand worries putting a cap on the market. The recovery in demand is likely to be bumpy due to the slow resumption of flights, and high unemployment restricting gasoline use.
- USDJPY – with a weak session overnight in Asia and a pickup in safe haven US treasuries, JPY crosses are back on the move, with USDJPY now poking down toward the 106.58 local lows and then the 106.00 area lows of early May. JPY implied volatility is picking up in the options market, suggesting that a more volatile period for JPY crosses may be brewing.
- GBPUSD – sterling trading somewhat heavily just above the key 1.2500 area in GBPUSD ahead of today’s Bank of England meeting. The pair has yet to trade above the 200-day moving average (just below 1.2700) again after rallying back higher earlier this week. Market reaction to Bank of England guidance on its policy mix – particularly negative interest rates, but also possible expansion of QE – could see considerable risk of volatility in sterling crosses today.
What is going on?
- Covid19 second wave outbreaks a source of concern with major accelerations in Texas in particular and continued concerns on the recent outbreak in Beijing.
- Former National Security Advisor John Bolton accused President Trump of asking for Xi’s help in winning re-election by increasing purchases of US agricultural goods and in general using re-election considerations in foreign policy decisions. This according to leaks of the content of Bolton’s new book detailing his time in the Trump White House.
- Far worse Australian job losses than expected in May, as the unemployment rate rose to 7.1% from 6.2% and payrolls declined –228k vs. -79k expected.
- Fed Chair Powell asks House Panel not to remove fiscal support too quickly in testimony before a House Panel yesterday, saying that the economy is in a “critical phase” of the recovery and needs continued support.
What we are watching next?
- Bank of England meeting Thursday – with sterling already under pressure on the risks of a tough stance from the EU on the post-Brexit transition period trade deal uncertainty, the Bank of England meeting this week will be interesting for whether the BoE strengthens guidance on an eventual move to a negative policy rate regime.
- EU Council meeting Friday - This is the next important meeting for the heads of EU countries as we look for a sense of solidarity or lack thereof around the plan to expand the EU budget by some EUR 750 billion to fund a Covid19 response.
Economic Calendar Highlights (times GMT)
- 0730 – Switzerland SNB Policy Rate announcement (no change to –0.75% rate expected)
- 0800 – Norway Deposit Rate Announcement (no change to 0.0% rate expected)
- 1100 – UK Bank of England Rate Announcement (no change expected to 0.1% rate – QE increase expected)
- 1230 – US Jun. Philadelphia Fed Survey
- 1230 – US Initial Weekly Jobless Claims and Continuing Claims
- 1430 – US Weekly Natural Gas Storage
- 1615 – US Fed’s Mester (FOMCE Voter) to Speak
- 2330 – Japan May CPI
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