Market Quick Take - September 25, 2020

Macro

John Hardy

Head of FX Strategy

Summary:  Risk sentiment pieced together a bounce yesterday after the broad US equity market posted new lows. The rally partially sputtered in the late US session, but sentiment brightened again overnight in Asia as the US dollar rally eased. Still, concerns are growing that the economic resurgence may be slowing in Europe and the US in particular without new stimulus measures.


What is our trading focus?

  • S&P 500 Index (US500.I) & NASDAQ 100 Index (USNAS100.I) – US equities were broadly higher yesterday on technical rebound of the lows pairing Monday’s lows. US Treasury Secretary Mnuchin also indicated willingness to increase fiscal stimulus that for Q4 has been lowered to a level where several economists believe it is significant headwind for economic growth. Nasdaq 100 failed to break above 11,000 making it a substantial and important technical resistance to overcome. S&P 500 futures showed support at the 3,200-level making a key level to watch if equities to continue to break down today.

  • STOXX 50 Index (EU50.I) – European equities will be stuck in the mud until markets see signs of a peak in new COVID-19 cases. We recommend investors to avoid the broad European indices and go for stock picking instead across indices until the macro picture changes for Europe. In STOXX 50 futures the 3,100 is the key support level that if broken leaves a lot of downside for European equities.

  • Spot Gold (XAUUSD) & Spot Silver (XAGUSD) - managed to recover from a two-month low with the dollar rally pausing on news that the Democrats are crafting a Phase 4 stimulus package (see below) while Fed officials sent mixed signals about the current state of the US economy. U.K. and France meanwhile recorded the highest number of new cases since the start of the pandemic. Silver which briefly recorded its second bear market this volatile year (on top of two bull market moves), managed to recover to close back above a key technical level at $22.90/oz while gold found support ahead of $1837/oz, the 38.2% retracement of the March to August rally. Both potentially supporting a return of confidence following a bruising week.

  • WTI Crude Oil (OILUSNOV20) & Brent Crude Oil (OILUKNOV20) - just like gold rose on hopes that US Congress may resume stimulus talks and that U.S. oil production has peaked and could slow further over the coming months. Before then, the market was already doing relatively well having managed to find support despite doubts about the rebound in demand with lockdown measures on the rise, together with the risk of rising supply and the stronger dollar. All signs that Saudi threat to surprise the market may have supported short covering from funds who held a 250 million barrel short in week to September 11. In Brent, the key area of resistance is $43.55/65 where the 50- and 200-day moving averages meet.

  • EURUSD & AUDUSD – Again, we look at these two pairs for a general sense of the status for the US dollar, with AUD one of the G10 currencies that has proven weakest against the US dollar in recent sessions, while the sell-off in the EUR has been more gentle in nature. AUDUSD reached all the way down close to the critical chart- and psychological point of 0.7000 as concern is growing on the reflationary narrative with second round virus outbreaks and notable commodity prices like iron ore easing. A break of 0.7000 could lead to a further retrenchment toward the 200-day moving average just below 0.6800. EURUSD has some further room to fall without threatening the uptrend, but needs to avoid any significant move below 1.1500, a pivotal chart area (arguably, the area extends slightly lower, but in broad sense, 1.1500 is the bull-bear line for EURUSD).

  • EURNOK & EURSEK – the Scandies ran sharply lower in recent session – particularly SEK yesterday (partially on negative Covid-19 news there) – in a move that may be mostly inspired by positioning and the breeching of technical levels like 11.00 in EURNOK and the 200-day moving average just above 10.55 in EURSEK rather than down to specific developments. Unless we see a vicious new sell-off in risky assets, the move may have overextended here, as we watch for signs of a technical reversal back lower for the two currency pairs. The NOKSEK cross is interesting as well, as it tries to avoid a breakdown through the 0.9500 level.

  • Exact Sciences (EXAS:xnas) - shares were up as much as 29% yesterday as preliminary results for its liquid biopsy detected multiple cancers from a blood sample providing hope of extending its cancer diagnostics method to other cancer types than colon cancer.

  • China Evergrande (03333:xhkg) - shares are down 9% in today’s session with the company’s bonds also under pressure. The Chinese property developer is one of the most indebted developers in the world with $120bn and is thus could become a risk for the Chinese equity market if confidence does not stabilise. The 1-year default probability according to Bloomberg’s default risk model is 3.8% which is the highest since 2018 translating into the lowest high yield rating available according to the model.

What is going on?

  • UK Chancellor Sunak announces tough decisions on drastic reduction for benefits. The UK’s generous furlough programme is seen as too expensive to continue, and UK Chancellor Sunak yesterday announced that would see new benefit levels at only about a quarter of the previous amount available and a switch to “subsidize wages” over the next six months. This will mean that many employers will be unable to keep many workers on their payrolls, with unemployment set to possibly rise sharply in coming months. Sterling was generally firmer yesterday.

  • US weekly initial jobless claims almost unchanged and continuing claims drop only slightly. The latest US weekly initial jobless claims number out yesterday was almost unchanged versus the previous week at 870k vs. 866k last week, an ongoing sign of the enormous disruptions in the US labour market, as the previous record high number pre-Covid-19 was below 700k. As well, the drop in the continuing claims was a modest –167k to 12.58M, a slow pace of decline that suggests a tough environment for those looking for employment.

  • Turkey hikes its repo rate 200 basis points versus mixed expectations of a far smaller move. The Turkish central bank shocked the market with a large rate hike taking the policy rate 200 bps higher to 10.25% versus expectations that the central bank would mostly look to employ other measures to stabilize its currencies. The move shocked the lira about 2% higher versus the US dollar before closing the day only about 1% stronger.

  • Mexico’s central bank moved ahead with a 25-bp rate cut to 4.25%. Recent consensus expectations were looking for the cut, but some may have believed that the sudden significant volatility across EM currencies would bring this move into doubt. The Mexican central bank moved ahead with the cut, however, and the Mexican peso firmed about 1% from the prior day by the end of the day after a spike both weaker and significantly stronger. The bank’s rate cut was the eleventh in a row but the first of .25% and the statement indicated it sees little further room for moving its policy rate.

What we are watching next?

  • US stimulus question continues to hang over the market – despite the stand-off over Trump’s plans to nominate a replacement for the Supreme Court in the last weeks before the election, Democrats are drawing up plans for a new $2.4 trillion stimulus – about a third smaller than their original plan passed by the House (but rejected by Republican majority in the Senate), and Trump’s Secretary of Treasury Mnuchin made positive comments on the prospects for negotiations – this was likely behind the sentiment improvement yesterday in US equities – but headlines on this will be key to watch in coming days and weeks.

Economic Calendar Highlights for today (times GMT)

  • 0800 – Italy Sep. Consumer-, Manufacturing-, and Economic Confidence surveys
  • 1230 – US Aug. Preliminary Durable Goods Orders
  • 1910 – US Fed’s Williams (Voter) to discuss Covid-19 job market.

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