Market Quick Take - October 12, 2020

What is our trading focus?

• Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities are in a very positive mood to start the week on hopes that a stimulus deal will be forthcoming and as US earnings season is set to get underway in earnest this week with the large financials in the spotlight. Given the steepness of the recent rally, any doubt cast over the market on stimulus prospects this week could spoil the mood suddenly. Most Fibonacci retracements have fallen on this latest rally as the focus will soon shift to the all-time highs for the major indices – for the Nasdaq 100 at 12,423 and the S&P 500 at 3,576 (less than 3% away).
  
  
• EURUSD and AUDUSD – the US dollar has “officially” rolled over as Friday saw key USD pairs crossing pivot zones that point to fresh weakness for the greenback. For EURUSD, the move above the key 1.1800 area points to a retest of the 1.2000 highs as long as the move above that pivot level holds and for AUDUSD, the setup is very similar after the pair crossed above the 0.7200 pivot level. It will likely be important for continued USD weakness to see a US stimulus deal struck this week, otherwise the bearish move against the USD could be rejected.
  
  
• USDCNH (offshore tradeable yuan vs mainland USDCNY rate) – Chinese policy makers seem to have sent a signal overnight that they would like to slow the rate of CNY strength for now, as the daily fixing was set weaker than expected and as the PBOC lowered the reserve ratio required for financial institutions to speculate against the currency from 20% to 0%. The moves come as the USDCNH rate has fallen sharply of late and briefly hit the 2019 lows before rebounding in Monday’s Asian trading session.
  
  
• Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - both raced higher on Friday driven by continued reflation focus, stimulus hopes and a weaker dollar. Total known ETF holdings reached a fresh record at 111.1 million ounces while funds in the week to October 6 turned small buyers of futures for the first time in three weeks. The week ahead is likely to offer more of the same with focus on the prospect for a new plan to support the economy and whether Trump has given up or will attempt a last-minute comeback ahead of the November 3 election. Gold is trading within a 55-dollar wide rising channel with resistance currently at $1938/oz.
  
  
• Brent Crude Oil (OILUKDEC20) and WTI Crude Oil (OILUSNOV20) have drifted lower but holding up relatively well considering the flow of news this Monday which is primarily focusing on increased supply. Operations in the U.S. Gulf of Mexico has restarted after the passing of Hurricane Delta, a strike in Norway ended while Libya is moving towards opening its biggest oil field with a 300k barrels/day capacity. Supporting the market are the prospect for more U.S. stimulus and the weaker dollar while Goldman Sachs in report concluded that a “Blue wave” U.S. election would be positive for energy. Weekly oil market reports from OPEC on Tuesday and IEA on Wednesday.
  
  
• Italian 10-year sovereigns (10YBTPDEC20). Last week sovereigns from the periphery have experienced a big rally pushing 30-years Portugal’s yields below 90bps. We believe that as the ECB worries about a recovery and Covid-19 cases continue to rise we will see yields from the periphery falling towards zero. Lagarde’s speeches today, Wednesday and Thursday can strengthen sentiment around these securities, and Italian BTP could gain the most.

What is going on?

• The Commitments of Traders report in week to October 6, found that speculators had increased their total futures long across 24 commodities by 7 percent to 2 million lots, the highest since May 2018. The buying was concentrated in natural gas, soybeans, corn, wheat and sugar. Others like oil saw net-selling despite higher prices while copper, cocoa and coffee were also sold. Small gold buying was seen ahead of the end of week rally back above $1900/oz.
  
  
• The EU is looking at tougher rules against the big US tech companies – The EU is looking at comprehensive new measures aimed at regulating “Big Tech”, as proposals for the new Digital Services Act are expected as soon as early December. The focus is on curbing the market power of the large digital platforms (the clear targets are especially US tech giants like Facebook, Apple, and Alphabet) and could force these companies to share data with smaller rivals.

What we are watching next?

• US stimulus prospects still a key question mark this week. US President Trump has changed direction several times on stimulus and a deal has yet to be struck, although his latest push in favour of a bigger stimulus deal rather than targeted measures has the market hopeful that a sizable stimulus package will be forthcoming. The latest offer from the White House of a $1.8 trillion package was rejected by Democratic House Speaker Pelosi as insufficient, as she called the funding for virus measures in their proposal, for example, as far short of what is needed. Treasury Secretary Mnuchin is said to be open to increasing the size of the overall package.
  
  
• Brexit deadline this Thursday will loom into view. UK Boris Johnson continues to claim that he is ready to walk away from talks with the EU if a deal in principle is not reached by the October 15 negotiation deadline he set months ago for the terms of the post-Brexit transition period relationship. After weekend talks with Johnson and France’s Macron and Germany’s Merkel, Johnson said that the EU will have to move on its position on fisheries. Top EU negotiator Michel Barnier and the UK’s David Frost are set to resume talks in Brussels today. The market looks as if it is pricing sterling as if a breakthrough is a strong possibility this week, but the situation could produce significant volatility in either direction depending on the outcomes around the Thursday deadline.
  
  
• US Q3 earnings. The earnings season kicks into gear this week with major US financials reporting earnings this week, including JPMorgan Chase on Tuesday and Wells Fargo on Wednesday. Given analyst expectations for a strong rebound in earnings there is a lot at stake the next two months. If earnings disappoint it could be a major roadblock for equities and potential a strong catalyst for a setback.

Economic Calendar Highlights for today (times GMT)

• US Bank Holiday – Treasuries not trading, equity market open
• 1100 – ECB President Lagarde to Speak
• 1400 – UK Bank of England’s Haskel to Speak
• 1500 – ECB Vice President Guindos to Speak

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