Market Quick Take - June 25, 2020
Chief Economist & CIO
Summary: Equity markets switched into defensive mode yesterday and overnight as the US announced tariffs on EU goods and concern about a second wave of Covid19 sweeping significant portions of the southern and western US has reached critical mass. The IMF downgraded its outlook for the world economy, projecting deeper recession and slower recovery. Oil prices were hit by virus related demand worries, gold's rally towards $1800/oz was halted by silver weakness while the US dollar rose across the board.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – the US equity market wilted yesterday, it seems initially on the announcement of new tariffs on imports from the UK and EU, but the drumbeat of Covid19 concerns continues to get louder and is likely the most significant source of concern. The price action makes it appear that the 10,000 area is pivotal for the Nasdaq100 and momentum looks bearish there after yesterday’s sell-off, while the 200-day moving average in the S&P500 is a key downside support and very nearby now at 3,014.
- XAUUSD (Spot Gold) - retraced lower after hitting the highest level in almost eight years. Weakness in silver halted golds attempt to reach $1800/oz yesterday after the IMF downgraded global growth and predicted a slow recovery. This together with the acceleration in virus cases hurt industrial linked metals, including silver, and without that support gold instead went looking for support, which we expect can be found towards $1745/oz.
- OILUSAUG20 (WTI) and OILUKAUG20 (Brent) - traded sharply lower after traders finally, as we have been warning, was forced to change their focus from successful OPEC+ production cuts to renewed worries about demand. Concerns that swelling U.S. stockpiles and a renewed spike in COVID-19 cases may slow the process towards a further recovery in global demand helped send both crude oils sharply lower. After hitting a multi-layer of resistance above $42/b WTI reversed lower to reach support at $37.50/b. A break could trigger a deeper correction given the risk of long liquidation from funds holding elevated longs, especially in WTI.
- NATGASUSJUL20 (Natural Gas) - has fallen to a 12-week low as the virus threat industrial demand while the weather has so far not been hot enough to trigger strong demand for cooling. With LNG export cancellations continuing to help swell of U.S. stockpiles we see the risk of even lower prices before forced production shut-ins start to emerge over the summer. This given the risk of gas stockpiles reaching capacity levels by October. Later today the EIA will publish its weekly stock report and stockpiles are expected to have risen by 108 bcf last week versus a 5-year average of 73 bcf.
- USDCAD – the dollar was broadly firmer on yesterday’s weak risk sentiment and that, combined with the steep sell-off in crude oil, impacted CAD in particular yesterday, with the pair now knocking on the door of upside breakout levels around 1.3685 as we watch whether the US dollar can continue to spread its wings and close the major gap on the UDSCAD chart between that level and the 1.3850 area that was broken on the way down in May.
- USDJPY– the pair reversed back higher after a breakdown the day before, a strong bullish rejection of that development and seems to demonstrate that when general market sentiment turns south, the US dollar outperforms the Japanese yen. Still, yesterday’s move only seems to shore up against the downside threat for now – a rally needs to take out the 108.00-108.50 zone to begin to suggest budding upside potential for this rangebound chart.
What is going on?
- US Covid19 case counts are rising steeply in the south and the west of the country, with seven states reporting record increases for a positive cases in a day and hospitalization rates in at least one major US city, Houston, Texas are said to have nearly filled intensive care units. This has prompted a slowing of plans to ease lockdown restrictions.
- The US intelligence services has declared that 20 Chinese companies have links to the Chinese military, including China Telecom and China Mobile, two large companies listed on US exchanges. Telecom equipment maker Huawei and Hikvision, a maker of surveillance tech, were also on the list, in addition to state-owned enterprises.
- South Africa’s supplementary budget announced to attempt shift in debt trajectory Finance minister Mboweni was out with stern language on deficits and the trajectory of the nation’s debt load and announced a plan to reduce spending and raise taxes in coming years, with additional funding coming from loans from the IMF and other international sources. The ZAR weakened slightly against a strong USD yesterday, with USDZAR still rangebound below recent highs near 7.51.
What we are watching next?
- Market nerves and US equity market technicals - Yesterday saw a sufficiently large sell-off to set nerves on edge and bring technical levels into view, especially the 200-day moving average in the S&P 500 index that is less than a percent below current market levels at around 3,014.
- US weekly Initial Jobless Claims – up at 1230 GMT today, this is one of the high frequency series most worth watching, together with the Continuing Claims series, that gives a sense of the shape and pace of the recovery, though there have been some issues in the reporting of these numbers in recent weeks. Today’s initial claims expected at 1.32M and continuing claims at 20M.
Economic Calendar Highlights (times GMT)
- 1100 – Turkey Central Bank Announcement (expected to cut rate 50 bp to 8.00%)
- 1130 – ECB Minutes of June Meeting
- 1230 – US May Durable Goods Orders
- 1230 - US Weekly Initial Jobless Claims and Continuing Claims
- 1330 – US Fed’s Kaplan (voter) to Speak
- 1430 – US Weekly Natural Gas Storage
- 1800 – Mexico Central Bank Announcement (expected to cut rates 50 bps to 5.00%)
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