Intraday Market Thoughts Archives
Displaying results for week of Jul 12, 2020Consumer Crunch Time
The EU Summit will discuss the 500 billion euros in debt given as grants and 250 billion euros in loans. Angela Merkel expects "very, very difficult negotiations". Note that the euro began its latest rally phase about 6 weeks ago when Germany and France first announced the EUR 750 bn proposal. Two Premium trades related to EUR pairs are currently +230 pips.
The old adage about never betting against the US consumer held true once again on Thursday as sales rose 7.5% compared to 5.0% expected. Incredibly, sales are now up 1.1% y/y and 2.9% excluding gasoline stations.
Within those numbers, there are some massive changes. Sales at food services and drinking places are down 26.3% y/y while closing stores are down 23.2%. On the flipside, nonstore sales (online) were up 23.5% and home improvement stores were up 17.3%. There has also been a notable jump in auto sales, which were up 7.5%. The Beige Book also noted tight auto inventories and higher prices. On that front, China followed a similar path but shortly after the reopening, auto sales began to flag.
The numbers emphasize the high stakes as Congress debates another stimulus package because at the same time, US initial jobless claims were at 1.3m, higher than the 1.25m expected. That still double the pre-pandemic record and the pace of improvement has slowed. More than 18m Americans are still receiving some form of unemployment benefit.
The market remained jerky and choppy Thursday and Treasury yields were lower. The mood favored risk-off trades and the dollar held a solid bid.
In US trading, the U Mich survey at 1400 GMT is forecast at 79.0 from 78.1 last month. The report is a good forward-looking indicator on spending and the consumer and it should provoke a market reaction.Indices & Oil Crossroads, Euro One Direction
Euro and sterling are neck-and-neck on the ascent after the European Central Bank stuck to the same amount under the pandemic bond purchase program. US jobless fell to 1.3 million, a new 3-month low. US bank earnnings were mixed, with Bank of America down afer falling profits, while Morgan Stanley rose on record-breaking revenue and earnings. Ashraf is watching oil as it scrapes the top of the March 9th gap, a close above 41.50/60 would help trigger the next leg down in USD. All major US indices are down, led by NASDAQ -1.6% as Twitter slumped after the hacking of the accounts of some prominent public. Today's Premium trade released after the ECB is +20 pips in the green, but +50 pips for members of the WhatsApp Broadcast Group who were alerted ahead of the issuance of the trade.
The Bank of Canada introduced a dovish style of forward guidance on Wednesday, but the currency market cheered it. CAD is now mixed today against the FX pack. The BoC delivered a mild surprise with a commiton ment to "hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved." Macklem made it clear that wouldn't be until the output gap was closed, which won't be until 2022 at the earliest.
It's early in the post-COVID world but don't rule out a change in the reaction function of markets. Rate differentials are a dead trade for now with everything in developed markets pinned to the lower bound; so the investing playbook is about certainty and growth-positive policies.
Euro at 4-Month Highs & 4 Analogs
The aim of the summit is to agree to an EU recovery fund that includes loans as well as grants. Lately, Germany has signaled it wants a deal and there are signs the Netherlands won't block it. That's probably enough to get it over the finish line but in the eurozone nothing comes easy.
The Bank of Canada kept rates unchanged at 0.25% and for the first time explicitely added rates would remain unchanged until inflation returns to the 2% target at a sustainable level. While that may sound CAD-negative, it is a clear message that rates will not head to zero, which helped the loonie alongside stabilizing oil.
Combined with low virus case numbers and a diminished risk of debt monetization, the case for the euro is improving. Asset valuations in the eurozone are also compelling but must be weighed against perpetually disappointing growth and unending political risk. Once again, watch Ashraf's Premium video (posted above) on the 4 crucial analogs (macro, technical, trend and fractal) to grasp how he re-insisted on buying EURUSD since mid April.
The rally to the key 1.14/1.15 zone signals that the balance could tip in the short term, especially with the US and UK facing their own set of risks. In FX you don't need to be impress to make gains, you just need to be more attractive than another currency.
A break higher for the euro could kick off a wider round of US dollar weakness. Tech rebounded Wednesday but at current valuations, it's tough to envision it attracting capital flows and Treasury yields are back near the COVID lows.
In short, if the euro was ever going to make a big break higher, now would be the time. The technicals in the day ahead will tell the story.
In the nearer term, the USD shifts to the Beige Book later today. Fed Presidents Mester and Bostic have highlighted a leveling off in US high-frequency data. That was backed up by a small dip in the New York Fed's weekly economic index on Tuesday. If that language finds its way into the Beige Book, the dollar could slide.Tech Takes Over
The insanity in Tesla's stock price on Monday is indicative of the mood in technology stocks at the moment. The $250 rise in its stock price to start the day was its entire market cap a year ago but that was followed by a $300 drop from the highs. The reversal took many of the high-flying tech stocks with it and the Nasdaq finished the day down 2.1%.
This could simply be another bump in the road in a rally that's spanned months but it will bear very close watching in the day ahead. It's a reminder that this is an emotion-driven market and greed can flip to fear in a heartbeat. That argues for laser focus on risk management.
Watch QQQ SOX XLK
Pay attention to the massive bearish engulfing daily candle on QQQ, Philly Semi Conductors Index (SOX) and the S&P's tech sector ETF XLK. SOX eyes next crucial support at 1998/99, QQQ is vulnerable to break below 256 towards 251. This move could be reinforced if US bank earnings outperform and accelerate the rotation from tech to DOW30 and BKX.Earnings season picks up this week and that will add an extra layer of intrigue.
Looking ahead, the US June inflation report is due at 1230 GMT. The consensus is for just a 0.6% y/y rise in prices but even a significant miss wouldn't rattle the market because the Fed will no-doubt remain accommodative for many months. The detail to focus on will be hourly and weekly earnings, which are forecast to rise 7.4% and 6.5% y/y, respectively. Those numbers highlight the boost from enhanced unemployment benefits and are a reminder of what's at stake if the Fed doesn't extend them.
In terms of the Fed, a speech from Brainard at 1800 GMT will be notable. She was the lone dissenter at the top ranks of the FOMC in the banks' capital plan – preferring to bar large banks from paying dividends --and she could expand on that. Alternatively, she could focus on the economy and lay out her views on what's coming next. She's not afraid to go against the grain and her thoughts are worth heeding.The Virus and the Economy
US handling of the virus has undoubtedly been a failure but the trend in the virus in other developed countries shows it can be tackled. Ultimately, the US will get there and took a big step on Saturday as the President wore a mask publicly for the first time.
In terms of data, the Florida number also wasn't as bad as the headline. The 35% jump in cases came on a 60% increase in the number of tests. As a result, the positivity percentage fell to 11.25% from 12.6%. In Arizona, Texas and California there are early signs of a leveling off in cases and people are undoubtedly practicing better social distancing.
While hospitalizations and deaths will likely rise through month-end, there is a narrow window for the US to lower cases enough by September to successfully open schools.
Pfizer also stoked some weekend optimism with the pharm company's CEO saying a vaccine could be approved in October. After a 1% gain on Friday, S&P 500 futures started the week higher.
The challenge for traders (especially those trading off indices) is to manoeuvre between the news of rising US virus cases and improved chances of finding an effective vaccine. The Premium Insight's WhatsApp Broadcast Group capitalised on Thursday's dip in indices and subsequent Friday bounce here.
With regards to FX, Ashraf is cautioning on the Chinese yuan's rally past the 7.0 level (USDCNY drops below 7.0), sugesting a key inflection point in the USD's next leg down. Recall how last year the 7.00 resistance in USD/CNY proved a stubborn barrier in the face of USD bids, until its break helped paved the way for rapid USD gains against most of currencies.
The focus will remain on the virus Monday with a very light economic calendar. Be advised that most states tend to report the weekly low in virus numbers on Mondays due to weekend testing bottlenecks. That's a factor the market should be better at pricing in but it continue to work.
CFTC Commitments of Traders
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.EUR +104K vs +98K prior GBP -16K vs -21K prior JPY +17K vs +24K prior CHF +4K vs +4K prior CAD -17K vs -21K prior AUD -1K vs -3K prior NZD 0K vs 0K prior
Euro longs dropped 20K two weeks ago but had a small bounce last week. Aside from that position, the speculative market is reluctant to pile into anything.
