Intraday Market Thoughts Archives
Displaying results for week of Aug 09, 2020Summer Stimulus on Standbye
Another week has gone by and US policymakers are deadlocked on further stimulus. White House economic advisor Larry Kudlow said that executive orders – to some extent – fill the need for a second stimulus package.
That comment sent a small shudder through the market but it was a soft bond auction later that sparked a US dollar bid and some stronger risk aversion.
The number of trend changes this week has been notable – bonds, precious metals, and USD. Yet the broader theme of complacency around the recovery, the election and stimulus remains the dominant theme.
Initial jobless claims placated some of the worries on Thursday as they fell to a 21-week low of 963K compared to 1100K expected. However there are still 28.2m Americans on some form of unemployment benefit and the absence of the $600/week bonus has to be hurting consumers at the moment.
Keep an eye on #Covid19 developments as the numer of cases in France rebounds strongly, while Germany warns about Spain and Greece and in the meantime deaths in Florida jumped back up. Some express puzzlement at how the rise in new cases is not causing new deaths, which could suggest a sign of world-wide immunity.
Precious Metals Mangled
Too much new money and too many weak hands was the story of the last leg of the gold market. A reversal in Treasury yields on increasing supply led to a rush to the exits and a 6% decline in gold and 15% drop in silver.
The drop undoubtedly means an end to this chapter in the gold rally. There is no major support until $1800 so the decline isn't necessarily over but a period of consolidation is overdue.
More broadly, the drop in gold came alongside a series of reversals from Treasuries to yields. Stocks held up before the S&P 500 fell 0.8% late in the day with tech doubling the declines.
Tech stocks attempted a recovery when Tesla rose 6% following uts 5-1 stocksplit announcement.
In Washington, the urgency for another round of stimulus has turned to deadlock. Trump will now try to push through an executive order that will pay $300/week instead of $600/week in special benefits and won't require states to chip in. Mnuchin said it would take two weeks to get the checks out and that will mean a lean month for consumers.
In the market, the day ahead will show if metals are a canary in the coalmine or separate from broad sentiment. The FX reaction so far has been tepid but AUD/USD is at the lows of the month (and AUG is typically a poor month for AUD/USD).
NZD/USD is another spot to watch as it goes back into lockdown after a family contracted the virus from an unknown source.
Executive Uncertainty
The US President waded into murky legal waters on Saturday with four executive orders that may extend stimulus benefits. The two most-notable were a deferral on payroll tax cuts and directive for $400/week unemployment insurance bonuses.
Trump doesn't have the authority to waive the payroll tax cut but can delay payments. However, it's not clear if employers will stop collecting it without knowing whether it will come due later. The $400/week stimulus is also dubious legally and will almost-certainly be challenged. It also requires states chipping 25% of the payment and it's not clear all of them will.
So while the payments are short-term positive for many Americans, the market's enthusiasm could be limited. Ultimately, what the move does is give Congress less incentive to move quickly and it potentially extends the deadlock.
It also hands some leverage back to Republicans and means that Democrats may have to accept a smaller package overall. That would be USD-positive and negative for risk assets and precious metals, an area we're watching closely.
The non-farm payrolls report on Friday was generally upbeat with unemployment at 10.2% compared to 10.6% expected. There were 1462K jobs compared to 1200K expected.
Again, while this is good news on the surface, it also takes away the impetus for Congress to act and that sets up more uncertainty as we approach the home stretch of the US election.
CFTC Commitments of Traders
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.EUR +180K vs +157K prior
GBP -15K vs -25K prior
JPY +31K vs +29K prior
CHF +12K vs +8K prior
CAD -23K vs -13K prior
AUD -1K vs -5K prior
NZD -1K vs -1K prior
The euro net short six months ago was -120K and the turnaround has been sensational. Longs have been rewarded lately as the structure of the euro makes debt monetization less likely. Still, there are considerable economic risks in the eurozone and the growth in virus numbers must be watched closely. Italy's cases were at a two-month high of 552 on Friday and followed that up with 463 on Saturday.
