Market Quick Take - July 8, 2020

What is our trading focus?

• US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – the S&P 500 is trading below yesterday lows and seems fragile amid the big move higher in the VIX Index over the past two sessions. We are leaning towards a retracement to the 3,100 as the first move as the market will begin pricing in the COVID-19 developments across the Sun Belt states with increasing ICU capacity being maxed out.
  
  
• OILUSAUG20 (WTI) and OILUKSEP20 (Brent) - trades lower within a tight range after being rejected at the $43.50 level in Brent crude. It supports our view that oil remain range-bound with rising virus infections across the three biggest fuel-consuming U.S. states and abroad raising concerns about a continued recovery in demand. IEA’s monthly overview of the worldwide oil market on Thursday is a key event.
  
  
• XAUUSD (spot gold) - sentiment remains strong the 1,800 level in sight and a breakout will attract more bets from CTAs which could then accelerate the trend. With nominal rates remaining steady and break-even rates moving higher the inflation expectations are rising which will most likely continue to support the move higher.
  
  
• EURUSD – the USD has strengthened broadly the last two sessions following the general pause in risk-on evident across equities and commodities. EURUSD is boxed into a tight range but is most likely skewed for a move lower if the situation in the US with COVID-19 infections worsen even further.
  
  
• LQD:arcx (US investment grade bonds) - the momentum in US investment grade bonds continued yesterday reaching a new all-time high despite high uncertainty over credit quality in the second half of the year. The risk-reward ratio looks bad in investment grade bonds and this bond segment is fragile to adverse developments in the US.
  
  
• VOOL:xetr (Long volatility / VIX futures) - with the VIX up from 25 to almost 30 in two sessions despite less volatile equity sessions the options market is clearly pricing a different information picture than the cash equity market.

What is going on?

• VIX is getting close to 30 again as options are pricing in high volatility over the coming months with the important Q2 earnings season during July and August. In addition, the acceleration in new COVID-19 infections globally could at one point create a new risk-off environment.
  
  
• US banks are estimated to get close to $24bn in fees from PPP loans for the service of facilitating the government’s aid programme to small businesses. JPMorgan and Bank of America are estimated to get $1.5bn and $2.6bn respectively from the programme. These temporary fees could lift Q2 earnings for US banks.
  
  
• Civil rights groups leave Facebook meeting disappointed as the groups’ demands have largely not been met. This could continue to fuel the advertisement boycott of Facebook which now accounts 1,000 advertisers including big names such as Verizon, Unilever and Ford.
  
  
• Offshore wind spending is set to overtake offshore oil & gas for the first time according to a report from Wood Mackenzie as the green transformation continues despite the economic setback from the pandemic. Earlier this year we coined green investing as one of the biggest themes in the coming decade and our view is still that some of the largest firms going forward will be those that address environmental challenges with smart technological solutions. The green agenda in Europe also got a boost from Lagarde saying ECB should ‘explore every avenue’ in the green transformation.
  
  
• Chinese officials hit by US visa restrictions over issues related to Tibet. This is another sign that US-China tensions continue to rise and will cause disruptions in the years going forward.

What we are watching next?

• Whether the COVID-19 resurgence extends to rising daily deaths as hospitalizations are now on the rise nationally in the US and with Texas setting new daily infections record yesterday.
  
  
• Initial Jobless Claims and Continuing Claims for the US economy are one of best timely indicators we have on the US economy. With the mixed signals we are getting across many macro variables, and especially on the labour market, these two series will be intensely watched. If these claims numbers fail to show solid progress amid their latest stagnation, then the market could get spooked.
  
  
• Q2 earnings season starts next week which will be the most exciting in many years as 80% of S&P 500 companies skipped their guidance in Q1 leaving investors to fly blind into the storm. With US technology stock valuations at record levels there is little margin for error so any revenue miss could lead to steep declines. The record high index weight concentration in S&P 500 by the large technology stocks mean that their results will make or break the equity market over the summer months.
  
  
• Corn traders will look towards the World Agriculture Demand & Supply (WASDE) report on July 10 for confirmation that the recent 10% rally can be sustained. Will the smaller than expected planted acreage announced recently be enough to make up for declining demand from ethanol producers thereby helping to keep inventories under control.

Economic Calendar Highlights (times GMT)

• 14:00 – ECB Vice President Luis de Guindos speech 

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