Chief Macro Strategist
Summary: Equity markets took an ugly beating yesterday as major European countries announced draconian new lockdown measures. Asia ex China responded in kind. The US dollar and Japanese yen rallied hard in response to weak sentiment, while precious metals and oil fell sharply. After the US session today, Apple, Amazon, Alphabet and Facebook are all set to report earnings.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - yesterday was the worst day since early September for US equity markets, with a broad sell-off taking down stocks 3-4% across the board, perhaps as the market gives up on the prospects of stimulus, mulls election uncertainty and eyes Europe Covid-19 shutdowns with fears that the US could be headed for the same policy decision under a Biden presidency. The S&P 500 sold off just below its 100-day moving average near 3,300 late yesterday, leaving only the 3,200 area low from September as the last level ahead of the 200-day moving average, currently 3,114. The Nasdaq 100 has yet to cross below its 100-day moving average, currently at 11,040 and the range low from September is at 10,656.
Stoxx 50 (EU50.I) - European equities were down 4% in what was a horrible trading session not only in local currency but also amplified by a stronger USD so European equities were unloved on all accounts from a foreign investor perspective. The reason is obviously the introduction of more restrictions and lockdowns in Europe heightening the risk of another economic recession in Europe. STOXX 50 futures look technically weak with an attempt to rebound this morning, but the market is offered and could potentially test yesterday’s lows.
USDJPY and EURJPY – the JPY rallied hard yesterday, flexing its traditional safe haven status, but eased off in later trading after USDJPY approached the 104.00 low from September. Besides a chaotic couple of sessions in the spring during the Covid-19 panic, USDJPY has not traded below 104.00 since 2016. In EURJPY, the pair broke the 122.40 area low, which could open the chart toward 120.00. One factor possibly hampering further JPY strength was the faltering bond rally, as treasuries as long US treasuries actually ended the day slightly lower after rallying earlier in the day.
AUDUSD and EURUSD – yesterday’s dive in risk sentiment helped support the US dollar, particularly against what had formerly been the resilient commodity currencies, with AUDUSD suddenly poking back toward the huge 0.7000 area and USDCAD breaking above the local resistance at 1.3250. Further risk sentiment declines and a technical break of these USD resistance levels could trigger considerable additional order flow and potentially drive AUDUSD towards its 200-day moving average below 0.6800, while EURUSD declines may prove more modest – but still with the big 1.1612 low from September the focus after next Tuesday’s US Election if the 1.1700 level falls.
Gold (XAUUSD) and Silver (XAGUSD) has found a small bid after yesterday’s stong dollar, weak stocks driven slump to a one-month low. Finding support at $1873 and a well ahead of the September low at $1848 has given the market a small but at this stage fragile shot of confidence. It can, however, quickly be shattered should the risk-off across other markets accelerate ahead of Tuesday’s U.S. presidential election. As mention in our latest update, the gold and gold mining options market using GLD:arcx and GDX:arcx ETF’s was up until yesterday squarely focusing on the upside with almost no puts among the recently most traded.
Brent crude oil (OILUKDEC20) and WTI crude oil (OILUSDEC20) - both slumped to the bottom of their respective ranges with surging virus cases in Europe and the U.S. as well as bigger-than-expected jump in U.S. crude stockpiles taking its toll on the market. Adding to this an ongoing production surge from Libya, the market is likely to trade defensively ahead of Tuesday’s major risk event. Some support from a growing belief that OPEC+ will delay its planned January production increase. Brent support at $38.80/b and WTI at $37/b with the risk of a market rout should they give way
Europe needs more stimulus, today we will know if the ECB will deliver on it (10YBTPDEC20). Gloomier economic forecasts will follow the implementation of new lockdown measures everywhere in Europe. The market is expecting more stimulus to arrive from the ECB in December; however, the central bank might start to act earlier than expected. If that were the case, we expect the periphery to rally led by Italian 30-year BTPs.
Apple (AAPL:xnas), Amazon (AMZN:xnas), Alphabet (GOOGL:xnas), Facebook (FB:xnas) - all four US companies report earnings after the US market close, but we expect given the higher volatility level in markets that trading activity and opportunities will be high in today’s session. Read our earnings preview on Apple, Amazon, Alphabet and Facebook here, and read our post Microsoft earnings take-away here.
What is going on?
France and Germany move to stricter lockdowns. With numbers in many European countries spiking out of control, full lockdowns are becoming a reality again. In France, French President Macron announced a full lockdown of all bars and restaurants for one month (until Dec. 1), a shutdown of non-essential retailers, a closure of its borders, while choosing to keep schools open. In Germany, Chancellor Merkel announced a closure of bars, restaurants and leisure facilities. The UK is seen as likely to move with additional measures soon as well.
US states suffering a cash crisis. The drop in local tax revenue during the Covid-19 crisis and lower revenue going forward could see a shortfall of $434 billion for the 2020-2022 time frame, according to Moody’s Analytics, with 46 of the 50 US states suffering budget stress. The Wall Street Journal is carrying a large piece on this (paywall) – but the emphasis here is on the scale of new fiscal measures requires to keep state-employed workers in their jobs and pension security linked to local employment.
What we are watching next?
US election scenarios and assessing the odds. In yesterday’s US Election Countdown article, our John Hardy runs down a menu of possible US election outcomes and how the US dollar and major asset classes might react to each of the scenarios, from an unlikely Trump win to a somewhat more likely Biden win with no Democratic taking of the Senate, all the way to a strong “Blue Wave” outcome.
ECB meeting up today - the market is looking for a major new QE expansion from the ECB in December at the latest, with some nod to the potential that the ECB will move now rather than wait due to the new Covid-19 lockdowns, but the ECB could just as well announce an acceleration of purchases and pre-announce December’s move in some fashion. It is doubtful whether the ECB can really move the needle much without significant innovation, as the policy ball is in the EU’s court, as fiscal stimulus is far more powerful than monetary policy expansion and the latest Covid-19 lockdowns will inevitably mean that more fiscal expansion will be needed.
First US Q3 GDP estimate out today – expected at an “absurd” annualized rate of 32% after Q2’s -31.4%, while personal consumption is expected to have rocketed +39% annualized versus –33.2% in Q2. In more normal terms, US GDP in Q2 dropped 9% year-on-year, adjusted for inflation, the worst quarter in US modern history, with this past quarter expected to show the best quarter ever if it can beat Q1 of 1984’s 8.6% rate.
The biggest single day of the US Q3 earnings season is today. Earnings from both US and European companies continue to surprise across both revenue and earnings. The reaction has so far been that companies meeting expectations have fallen a bit while those that miss are hit hard like we saw with SAP on Monday. Today is all about the mega caps within the US technology stocks:
Economic Calendar Highlights for today (times GMT)
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