A surge in coronavirus cases and deaths have soured the risk sentiment ahead of the weekend. The S&P 500 trades near the low of the week, crude oil extending its losses on demand concerns while gold has struggled to ignite fresh buying momentum above $1800/oz. The dollar once again acting as the go-to currency while bond yields dropped in response to a well-received 30-year debt auction. An eight-day buying frenzy in Chinese stocks paused with Beijing showing some unease over the speed of the recent rally.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – the S&P 500 is headed lower again after attempting a rebound yesterday. Sentiment soured throughout the session over first new US regulation on Chinese technology firms such as Huawai and then rapidly rising COVID-19 deaths in Florida and nationally which climbed to highest levels since 8 May. The 3,114 is a support region in the S&P 500 and if taken out the next obvious level that the market will be looking for is around 3,041.
- OILUSAUG20 (WTI) and OILUKSEP20 (Brent) – are both looking for support as surging coronavirus cases raise fresh concerns about demand at a time where OPEC+ cuts attempt to reduce the global overhang of supply. The three biggest fuel-consuming U.S. states have recorded their biggest daily gains in virus cases and deaths this week. While this week’s range in Brent crude has been the narrowest since last September, these latest developments still support our Q3 view that Brent is likely to remain stuck within a mid-30’s to mid-40’s range. Later today at 08:00 GMT the International Energy Agency (IEA) will publish its monthly Oil Market Report in which they provide their views supply and demand developments.
- XAUUSD (spot gold) and XAGUSD (spot silver) – buying has paused with risk appetite receiving a knock from lower stocks and oil and a stronger dollar. Gold is heading for a fifth weekly gain, but the failure to attract renewed momentum on the break above $1800/oz has raised the short-term risk of setback as recently established longs risk could get squeezed. Our bullish outlook has not changed and despite the s/t risk of correction/consolidation we still view gold as a key diversifier amid an uncertain global outlook. A view shared by Goldman Sachs that sees the price hitting $2000 within the next 12 months.
- CORNSEP20 (Corn) and WHEATSEP20 (Wheat) – Grain traders await the World Agriculture Demand & Supply (WASDE) for confirmation that the recent 10% rallies in corn and wheat can be sustained. Short covering has been the main driver with demand for corn been triggered by the recent lowering of the US planted acreage while wheat has rallied on multiple concerns over global supplies.
What is going on?
- US COVID-19 new daily cases rose to new record 63,206 yesterday a daily change of 2.07% which is highest registered growth in new cases since early May underscoring the seriousness of this second wave in the US. The news that confirmed deaths in Florida was up 120 in one day, a dramatic increase compared to the previous two months, spooked the equity market. Data from open table also suggest that people in the Sun Belt states are changing their behaviour.
- Chinese equities are coming down from the stratosphere as the CSI 300 Index was down 1.7% at one point today following news that a group of China government-owned funds were reducing their equity exposure. The newspaper China Economic Times also warned in an editorial about the dangers of the jump in equities that has some of the same characteristics as in 2015.
- Chinese technology companies hit new US regulation prohibiting the US government from giving federal contracts to Chinese technology companies such as Huawei, Hikvision, Dahua, Hytera and ZTE. The equity market’s initial weakness in yesterday’s session started around this news hitting the wire.
- Initial jobless and continuing claims were a relief for the market which both came out below estimates although still at elevated levels. Especially the initial jobless claims remaining above 1.3mn per week suggest ongoing labour market destruction as companies are adjusting their operating expenses to emerging situation.
What we are watching next?
- US COVID-19 daily deaths across the Sun Belt states as the market now seems to be reacting to the news on COVID-19 also because other real-time indicators are suggesting that consumers are changing their behaviour again. In Europe we are beginning to see signs of acceleration in new cases in countries such as Portugal and Bulgaria paving the way for a potential resurgence here in Europe where tourism will begin to pick up over the next two months.
- Q2 earnings season which starts next week with financials in focus but yesterday Walgreens delivered terrible earnings missing estimates by 30% and the outlook really spooked investors. If this is any guidance for the general earnings season it will be a disaster. According to earnings estimates Q2 earnings will be the worst since 2011 but it will also 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.
Economic Calendar Highlights (times GMT)
- 08:00 – IEA’s Monthly Oil Market Report
- 12:30 – US June PPI
- 12:30 – CAN June Unemployment rate
- 16:00 – World Agriculture Supply and Demand Estimates (WASDE)
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