Market Quick Take - September 11, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  US equities sold off again after an early attempt to extend the rally off recent lows, with the Nasdaq 100 closing near key support. In FX, the euro rally in the wake of the ECB meeting was rebuffed and sterling has fallen into a nosedive on a complete lack of progress in Brexit negotiations. The economic calendar highlight for today is the US August CPI release, as US inflation fears have risen strongly in recent months.


What is our trading focus?

  • S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – the renewed sell-off yesterday came as a disappointment for bulls as it cut short the strong comeback attempt from recent lows, and the renewed selling took the Nasdaq 100 and the S&P 500 back close to their lowest closing levels on this recent sell-off on Wednesday. Further selling from here would begin to point to a more severe breakdown of the well-organized rising trend channel in the Nasdaq 100 since April (and notable 11,000 area) and begins to confirm the S&P500 breakdown back below the pre-COVID-19 high near 3,400.

  • STOXX 50 Index (EU50.I) – realised volatility continues to be compressed against the VSTOXX Index (implied volatility) with the index trading right in the middle of the longer-term trading range of 3,200-3,400. The ECB provided little except an upward pressure on EURUSD likely causing a bit of headwind for European equities.

  • EURUSD EURUSD rallied in the wake of yesterday’s ECB announcement and as the President Lagarde press conference unfolded yesterday, but the rally was quickly erased in sympathy with the sell-off in US equities later in the day, suggesting that USD demand remains sensitive to risk sentiment. One of the reasons for the EUR rally was the ECB’s more optimistic tone on the course of the recovery and the expression of a lack of concern on the current level of the euro, even if Lagarde clearly stated that the euro is a component in calculating inflation risks.

  • EURGBP & GBPUSD the bottom is dropping out for sterling as yesterday showed deepening signs that the EU and the UK may be heading for a No Deal post-Brexit transition period. After the UK moved to draw up legislation that override key terms of the original withdrawal agreement that triggered Brexit, the EU gave the UK a three-week ultimatum to stand down from such a course of action and threatened legal action. The UK in turn rebuffed this move and there has been no further progress. Sterling traded to new lows versus the EUR since March and GBPUSD has tumbled nearly 5% in less than two weeks.

  • Spot Gold (XAUUSD) - trades lower after yesterday’s failed attempt to break above $1960/oz after risk sentiment received a knock from another day of weakness on Wall Street. Inflation focus today with US CPI expected to show a year-on-year rise to 1.2% from 1%.  Overall, the market remains rangebound while a record run in gold being accumulated via ETF’s highlights the strong underlying demand that is likely to continue as long the weak dollar/rising inflation/stimulus themes continue to be the focus.

  • WTI Crude Oil (OILUSOCT20) & Brent Crude Oil (OILUKNOV20) - as well as gasoline and diesel all show weekly losses of more than 6% as weakening fundamentals continue to weigh on the market. The expected recovery in demand has slowed with a rising Covid-19 case count occurring at a time where OPEC+ is adding barrels back into the market. Fundamental oil market guidance will be provided by OPEC and the International Energy Agency when they publish their monthly oil market reports on September 14 and 15 respectively. For now, both benchmarks have made a double bottom close to $36/b on WTI and $39.50/b on Brent.

  • 10-year Treasuries (10USTNOTEDEC20) - Long maturities US Treasuries are softer after the auctions of Wednesday and Thursday. The US yield curve steepened slightly making us believe that investors are more concerned about Treasury supply rather than inflation. CPI numbers today will be key: if inflation surprises to the upside, we can expect volatility in the longer part of the curve and a 5s30s steepening.

  • Nikola (NKLA:xnas) - shares dropped 11% yesterday on a short seller report from Hindenburg Research accusing Nikola of being a fraud. The CEO and co-founder immediately refuted the claims on Twitter, but Nikola provided little defense during the session and thus shorts piled on. One of Nikola’s key suppliers and early investors German-based Bosch says that its quoted comments in the report are taken out of context. Today’s trading session will all depend on the defense that Nikola communicates to the market, which is expected to be before the market opens.

  • Peloton (PTON:xnas) - shares followed the Nasdaq 100 lower ahead of its earnings release after the US market close. The FY20 Q4 numbers were much better than expected with revenue at $607mn vs est. $581mn and adjusted EBITDA came in at $144mn vs est. $68mn. Peloton also published its FY21 guidance on revenue at $3.5bn vs est. $2.74bn indicating strong expectations. Shares were up 10% in extended trading and given the strong outlook the stock will likely experience a breakout to new all-time highs.

  • Corn (CORNDEC20) & Soybeans (SOYBEANSNOV20) - At 16:00 today, the US Department of Agriculture will publish its monthly World Supply and Demand Estimates (WASDE). Grain traders will be looking for data to support the recent strong rally across the sector.  Dry US weather potentially hurting crop prospects and strong Chinese demand are both expected to have reduced production levels and the amount of stocks available at the end of the 2020-21 crop year. The combined speculative long in corn, wheat and soybeans sits at 325,000 lots above the five-year average. This at a time of year where funds generally tend to be net sellers given the lack of unknowns ahead of the arrival of the new harvest.

What is going on?

  • US Weekly Initial Jobless Claims were a disappointment yesterday, registering the same level as the previous week at 884k, and thus still above pre-COVID-19 records (665k was the previous high for initial claims) while the continuing claims data rose to 13.4M, a bad miss relative to the 12.9M expected and 13.3M the previous week.

What we are watching next?

  • US August CPI release and market reaction – markets are trading as though US inflation concerns are active and growing, with US inflation expectations and increasingly negative real rates suggesting that the US is in a very different place with inflation than, for example, Europe or Japan. Today’s CPI could go far to either temporarily enhance or challenge that narrative and comes after and interesting reversal in the US dollar yesterday, where a sell-off was halted as global risk sentiment soured.

Economic Calendar Highlights for today (times GMT)

  • 0800 – ECB's Villeroy and Weidmann to Speak
  • 0930 – ECB President Lagarde to speak at Eurogroup press conference
  • 1230 – US Aug. CPI
  • 1600 – USDA's World Agriculture Supply Demand Report

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