The US equity market rallied steeply after posting new local lows yesterday and has followed through in overnight trading on no readily identifiable catalyst. The USD and JPY were sharply lower in sympathy with the move as we look ahead to testimony today before a Senate panel from Fed Chair Powell.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – US equities launched an almost vertical rally yesterday from a deep funk in the futures market in early European hours to a very strong close of the cash session in the US, a move that has followed through overnight and has the S&P500 this morning trading more than 6% above yesterday’s lows. The S&P 500 rally has slowed this morning right near the 3,109 level, the 61.8% Fibonacci retracement of the recent sell-off, while the Nasdaq has rallied above the similar technical level and has only the 76.4% Fib retracement at 9,958 and then the all-time top up at 10,140 as the final resistance levels.
- OILUSJUL20 (WTI Crude Oil) and OILUKAUG20 (Brent Crude oil) – just like stocks received a boost yesterday following the Federal Reserve’s corporate bond buying announcement. Demand concerns following new outbreaks in Beijing and some U.S. states are being offset by the strong OPEC+ production cut commitment and an EIA drilling report that forecast a continued drop in U.S. shale oil production for July. The focus now turns to the monthly oil market reports from the International Energy Agency today and OPEC on Wednesday. Tomorrow the OPEC+ Joint Technical Committee, which advise the oil ministers, will meet to discuss latest developments. We maintain the view that oil has entered a consolidation phase which should leave the potential for further short-term gains limited.
- XAUUSD (Spot Gold) – remains stuck in a wide $1680/oz to $1750/oz range and currently struggling to find a theme strong enough for it to attempt a breakout. On Monday it surprisingly followed US stocks lower before the Fed corporate bond buying announcement sent it higher. Focus on today’s testimony before a Senate panel from Fed Chair Powell. The current lack of momentum has triggered a 55% reduction since February in bullish gold bets held by hedge funds in the New York futures market. During this time however demand for bullion-backed exchange-traded funds have stayed strong, climbing to a record 101 million ounces.
- CORNJUL20 (CBOT Corn) – closed near a two-month high yesterday as U.S. crop conditions slipped and domestic prices in China reached a five-year high as a recovery in hog herds boosts consumption and tightens supply. Hedge funds held a near record 297k lots net short in the week to June 9. The steady price recovery seen since late April is at risk of suddenly accelerating should funds begin to cover some of these shorts.
- AUDUSD – the AUDUSD pair has entirely mimicked the price action in equity markets in recent days and is likely to continue to provide a high beta exposure to the latest risk-on, risk-off (RORO) gyrations in global asset markets, together with AUDJPY.
- GBPUSD – after having a look below 1.2500 yesterday in early trading to start the week, sterling recovered sharply both here and versus the EUR after EURGBP had crossed above the key 0.9000 level. The GBPUSD is currently trading just ahead of its 200-day moving average and looks correlated at the moment, with risk-on, risk-off behaviour, though sterling did get a boost yesterday from positive spin from UK-EU Brexit deal talks. A possibly pivotal BoE meeting is up on Thursday.
What is going on?
- US Fed announces updates to corporate bond buying facility with the changes meaning that the Fed will be buying individual bonds in the secondary market rather than merely bond ETFs, as was the case earlier. The focus is declared to be to “support market liquidity and the availability of credit for large employers.” This sent the LQD ETF, the best-known ETF of investment-grade bonds, soaring to a new all-time high.
- NZD sold off on new Covid19 cases. The country was recently celebrating its elimination of the virus and the implications for a quicker opening up than elsewhere saw NZD rallying sharply, but two travellers to NZ from the UK tested positive after they had been allowed to travel to a relative’s funeral rather than staying in quarantine. This prompted a NZD sell-off.
- Brexit deal: UK and EU see deal moving closer – Positive comments from both sides in talks yesterday between UK Prime Minister Boris Johnson and EU leaders suggest a more amicable situation than other recent comments from the EU’s Barnier in particular. Formal talks are set to resume on June 29 as Boris Johnson has ruled out extending negotiations beyond the December 31 deadline.
What we are watching next?
- EU Council meeting Friday – This is the next key meeting for the heads of EU countries as we look for a sense of solidarity or lack thereof around the plan to expand the EU budget by some EUR 750 billion to fund a Covid19 response.
- US Fed Chair Powell to testify before Congress today – we have just heard from Fed Chair Powell at last week’s FOMC meeting press conference, but the interesting angle this week for markets could be the degree to which Democratic members may look to criticize the Fed’s role in driving inequality and criticism that their efforts are rewarding the wealthy via a new market bubble. Loud criticism could affect Fed signalling at the margin as the 2020 election approaches.
- Bank of England meeting Thursday – with sterling already under pressure on the risks of a tough stance from the EU on the post-Brexit transition period trade deal uncertainty, the Bank of England meeting this week will be interesting for whether the BoE strengthens guidance on an eventual move to a negative policy rate regime.
- Monthly oil market reports from the International Energy Administration today and OPEC on Wednesday will provide further input to a market that is trying to stabilize following the carnage seen these past few months.
Economic Calendar Highlights (times GMT)
- Poland Central Bank Rate Announcement (no time given)
- 0900 – Germany Jun. ZEW Survey
- 1230 – US May Retail Sales
- 1315 – US May Industrial Production and Capacity Utilization
- 1400 – US Fed Chair Powell to testify before Senate Powell
- 1400 – US Jun. NAHB Housing Market Index
- 2000 – US Fed Vice Chair Clarida to speak on Economic and Policy Outlook
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