Market Quick Take - May 1, 2020

Today sees an important weekly close for US equity markets, as we note below – continental European markets are closed for the May 1 holiday.

What is our trading focus?

• US500.I (S&P 500 Index) and USNAS100.I (Nasdaq 100 Index) – The setback in the major US indices yesterday and overnight, especially after giants Apple and Amazon reported earnings (see more below) have wiped out most of the gains for the week and today’s close is important in establishing whether we see the bearish candlestick heading into the weekend.– the first in many weeks after poking into an important resistance zone in the broader S&P without breaking it -
• AAPL:xnas (Apple): In our preview on Monday we said it could go both ways and the earnings release was mixed. FY20 Q2 revenue was better than expected and the dividend was lifted to $0.82 up from $0.77 and against $0.80 expected. The company also increased its share buyback programme to $50bn. The company said that late March and early April was very depressed due to closed stores but also said second half of April has seen a pickup without specifying how much. COVID-19 has improved sales in App Store and TV+ but reduced advertising sales. The CEO Tim Cook said that the COVID-19 was hitting Services segment both ways underscoring the uncertainty for the company. Shares were down 2% in aft-mkt trading after the company didn't provide a forecast for the first time in more than decade, sparking concerns that performance will suffer later this year.
• AMZN:xnas (Amazon): As we wrote on Monday in our equity update Amazon was this week’s dark horse and it turned out to be so saying “it’s the hardest time we have ever faced”. The e-commerce giant reported Q1 revenue of $75.5bn beating estimates of $73.7bn and reported EPS was $5.01 vs estimates of $6.27. Amazon also told its shareholders to take a seat in Q2 as the company promised to spend $4bn on protecting its employees from getting COVID-19 which would complicate processes and increase expenses. The company guided a potential operating loss in Q2: “Operating income (loss) is expected to be between $(1.5) billion and $1.5 billion, compared with $3.1 billion in second quarter 2019. This guidance assumes approximately $4.0 billion of costs related to COVID-19.”. It seems the latest pressure from labour unions and strikes at many warehouses in Europe have forced Amazon improve conditions causing higher expenses. The company hired 175,000 additional workers to meet demand and has increased the overpay to twice regular pay putting pressure on margins. Shares were down 5% in aft-mkt trading putting pressure on NASDAQ 100 futures.
• USDCNH – USD versus the offshore Chinese yuan. The USDCNH exchange rate rallied the most since March in a big move that came without any specific catalyst. Some of it is certainly down to renewed USD strength, but could be a sign of rising US-China tensions – see below. In any case, this exchange rate is vitally important for markets and a further move higher of the magnitude of yesterday would send a signal and flag a devaluation risk that would spook markets.
• Tesla (TSLA:xnas) – worth noting that yesterday’s gap opening on what were billed as positive earnings (but we think otherwise) were erased and then some in yesterday’s session on the backdrop of weaker sentiment and perhaps even more so on a prominent hedge fund manager and Tesla short David Einhorn questioning the company’s account receivables data in the quarter in a tweet.
• Visa (V:xnys): the credit card company warned that it will be challenged “for a number of quarters” even as it reported solid results and a signs of a growing stabilization even as April saw a 19% drop in card relative to the prior year. The stock price was down only slightly in late trading after the earnings report. The company has promised not to lay off any employees.
• EURUSD – the euro rallied steeply yesterday – not entirely sure that the ECB meeting was the direct catalyst for this move, but with weak risk sentiment and ugly sell-offs in commodity and risky currencies, it appears a consensus trade recently may have developed in short euro, long risk trades. The next obvious pivot level is the big 1.1000 round figure which was approached, but did not break back in mid-April.
• AUDUSD – the AUDUSD, our favourite risk proxy in the G10, sold off hard yesterday and is already contending with the pivotal 0.6450 area that was critical on the way up – a weekly close well below that level possibly sets up renewed bearish interest for a push back lower if risk sentiment is taking a swing for the worse. We have concerns that Chinese demand for Australian imports could prove less robust than the market hopes.
• 10YBTPJun20 – the Italian June, 10-year sovereign bond (BTP) future: we continue to watch Italy sovereign debt for signs of EU existential strain – yesterday’s ECB meeting failed to bring any notable relief to Italy-Germany yield spreads.
• OILUSJUL20 (WTI) and OILUKJUL20: Crude oil is heading for its first weekly gain in a month in response to production cuts being announced by others than just OPEC+ and on signs that the coronavirus-driven plunge in demand has started to bottom out. Resistance today at $23 on WTI and $28 on Brent with the outlook still challenged as storage tanks continue to fill. The race to avoid tank tops and with that the risk of forced shut-ins remains a key risk and the futures market could be at risk of rising to levels not supported by the developments in the cash market.
• Gold (XAUUSD) has entered another phase of consolidation with focus on support at $1655/oz followed by $1634/oz. The yellow metal has been hurt by the prospect for a Covid-19 treatment drug and easing lock-downs leading to a V-shaped recovery. Adding to this the risk on seen across stock markets, despite rising unemployment and pressure on company earnings. We view to road to recovery as being anything but V-shaped and while the short-term technical outlook has deteriorated the long-term fundamentals have not.

What is going on?

The ECB meeting saw the ECB swinging into gear with more new policy moves than were expected even as it left the interest rate unchanged, as the bank lowered the TLTRO rates and added a Pandemic Emergency TLRO, or PELTRO, to lend . The interest rate is as low as -1.00% to incentivize banks to lend.

Apple and especially Amazon earnings have set a negative tone coming into the final day for the week as noted above. Yesterday’s big batch of earnings completes the vast majority of the big names to report this week, though we have the largest two US oil majors reporting earnings today.

US weekly jobless claims were out at 3.8M – but do note that continuing claims rose 1.7M less than the new claims, suggesting some of those laid off in previous weeks have found new employment. In the coming weeks, this data point an important one in reflecting the shape of the US recovery.

German April Unemployment Change worst ever at +375k – and German unemployment shot up to 5.8% from 5.0% in March. The European labour market is much “stickier” than the US market, but the massive jump of unemployment change to +375k in April shows that even in Germany, one of the least hard-hit of major EU countries on what is widely considered a model response to the Covid19 outbreak, layoffs are widespread.

What we are watching next?

Exxon (XOM:arcx) and Chevron (CVX:arcx) earnings – these are the two largest US oil majors and it will be interesting to see their outlooks and levels of capital investment intentions. Chevron which has jumped by 70% since the March low, reports before the market opens and Exxon (up 48%) is set to report at 11:30 New York time.

Next week US Apr. ISM Non-manufacturing employment data and ISM N The ISM manufacturing data point set for release today but likely to get little notice, as the dominant services sector is so critical for the US economy. On that note, next Tuesday will provide the benchmark level for the ISM non-manufacturing survey from which activity is likely to improve as the US opens up – but at what pace. Similarly, next Friday will bring the benchmark unemployment rate for the cycle. US Bloomberg expectations for the US Nonfarm Payrolls change is running at -22 million, more than 20 times the worst ever single month reading, and the unemployment rate expected to rise to 16.3%.

US-China relationship – rising signs of bad blood between the two great powers has largely gone un-noticed, but it appears US President Trump is swinging around to the more negative statements on China that party members have long urged him to, and a renewed blast of tariffs or similar from the Trump administration could set the market on edge at any moment.

Economic Calendar Highlights (times GMT)

• 1400 – US Apr. ISM Manufacturing - the market not interested in how bad things were this month, more interested in how quickly they improve in coming months.