Market Quick Take - May 18, 2020

What is our trading focus?

• US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – US markets managed to recover into the close Friday and were bid overnight after the US Fed Chair interview (see more below). Technically, both indices remain in limbo, with very clear resistance lines etched at 2965 for the S&P 500, with last week’s low of 2760 providing the support line. For the NASDAQ 100, the resistance line is less clear, but the 21-day moving average near 8910 and last week’s low at 8847 are perhaps the downside pivot levels of note.
• EURUSD and USDCNH – last week failed to resolve the near-term direction for the broad US dollar as EURUSD continues to stick around the 1.0800 area, showing no directional momentum. We are closely watching for whether a fresh wave of USD strength develops here, as a stronger US dollar acts to tighten liquidity in the global financial markets. In turn, any new USD strength will increase focus on the USDCNY exchange rate for further upside pressure – another destabilizing risk, especially with a backdrop of higher US-China tensions.
• AUDUSD – this is another USD pair we continue to watch as a proxy for the US dollar, risk appetite within FX, and even, to a degree, for the direction of the US-China relationship. The AUDUSD rate continues to trade in a tight range, with a clear downside pivot zone between 0.6400 and 0.6375.
• GBPUSD and EURGBP – sterling is under heavy pressure on Brexit concerns rise to the top again and EU chief negotiator Barnier said ahead of the weekend that he is not hopeful on the course of Brexit talks. The UK’s current account deficits and massive Covid19 fiscal response are perhaps also weighing on sterling as 1.2000 looks the next major psychological support for GBPUSD and 0.9000 approaches in EURGBP.
• XLF:arcx (US financials sector) and BNK:xpar (European banking sector) - focus on banks in the US and Europe this week as Berkshire Hathaway trimmed its holdings of US financials (Goldman Sachs and JPMorgan Chase) in a sign of a less attractive future for banking. We highlighted on Thursday the theme of governments crowding out private capital in banking and with the market pricing in negative rates in the US and European banks at decade low prices the banking industry could continue to underperform. We are underweight banks.
• XAUUSD & XAGUSD – Gold’s climb to a fresh 7-year high on growth worries is another reminder about the shaky foundation the current stock market rally is built on. The latest driver was a warning from the Federal Reserve on Friday, that the economic recovery would be very bumpy and could take until the end of next year, but also that the Fed is far from running out of ammunition to support the economy. While investors have accumulated a record holding in bullion-backed ETFs, hedge funds are now forced back on the buy side after having cut exposure since March. As well as heightened geopolitical worries the focus will be on Powell and Mnuchin’s appearance before the Senate Banking Committee on Tuesday. Gold is now taking aim at $1800/oz while silver’s strength will be tested at $17.50/oz,
• OILUSJUL20 and OILUKJUL20 – Crude oil continues to push higher as production cuts from within and outside the OPEC+ group are providing speculators with a perfect backdrop to accumulate exposure. In the US the number of rigs have been cut to the lowest since 2009 while the expiry tomorrow of the June WTI contract is expected to be a non-event after stockpiles at the key storage hub in Cushing, Oklahoma, shrank last week. The recent rally and with that the collapse in time spreads should see storage plays begin to be abandoned thereby adding supply to be the market. The biggest short-term risk however remains the risk of producers beginning to waver on maintaining cuts, especially in the US with the price back above $30/b.

What is going on?

US Fed Chair Powell was interviewed late Sunday in a US news programme and, while continuing to downplay the likelihood of a negative rate policy, seemed more interested in reassuring the viewing public that the Fed is far from out of ammunition if more support for the economy is needed. This after a speech last week seemed to suggest the Fed was hopeful that the US Congress would do more of the heavy lifting for supporting the economy. Powell did say there was likely no V-shaped recovery even if it would be steady.

Japan’s Q1 GDP only dropped –0.9% QoQ better than the –1.1% expected and compared to the –3.8% drop in the EU number shows that Japan has been far more successful in avoiding the scale of impact elsewhere.

Active US Hurricane season ahead? A named storm has formed in the Atlantic, two weeks ahead of the official start of the Atlantic hurricane season, with conditions apparently favourable for extensive storm development this season. This is highly unusual to see such early activity.

What we are watching next?

US-China trade tensions. The unfriendly exchanges between US and Chinese officials continue and the latest US moves Friday against Chinese tech giant Huawei are a sign of escalating tensions. Further exchanges and the status of the US-China trade deal could unsettle markets this week.

Economic Calendar Highlights (times GMT)

• 0800 – Switzerland Weekly SNB Sight Deposits – this release offers data on how hard the SNB is having to lean against the pressure of the CHF to rise against the EUR as the 1.0500 level appears to be the line in the sand for the SNB
• 1400 – US May NAHB Housing Market Index – one of the most forward indicators on the US market and worth watching in the months to come for signs of general confidence in an area as major as the decision to buy a new home.
• 0130 – Australia RBA Minutes – the Australians central banks seems to be on a more hopeful footing relative to the RBNZ – interesting to see any internal dialogue that suggests otherwise.