A mostly muted session yesterday in which a gentle equity market sell-off failed to hold and markets have rebounded slightly further overnight. Today is the quadruple witching day for US options and futures contracts, with the technical situation for markets rather stuck in limbo and the market generally at loss for a catalyst. An EU council meeting is up later today with the EU budget on the agenda.
What is our trading focus?
- US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – the major equity index are offering few directional clues ahead of today’s large derivatives expiry, as we continue to focus on whether 10,000 can hold in the Nasdaq 100 (with the 21-day moving average on a daily close basis one of the first signs of a breakdown – rather far away at present near 9,700) while the S&P 500 is almost exactly half-way between the 3,220 area top from last week and the important 3,000 area to the downside.
- OILUSJUL20 (WTI Crude Oil) and OILUKAUG20 (Brent Crude oil) – look set to end the week near the top of the established ranges. OPEC+ cuts and a high level of compliance together with upbeat comments about a rapid recovery in demand from two of the world’s biggest trading houses have off-set the continued risks related to new coronavirus outbreaks. Probably on the expectations that a second wave will not lead to the same draconian lockdown measures that was seen back in March. Weighing against a continuation of the rally remains the risk of rising US production eating some the cake that OPEC+ was expected to share once supply cuts are eased.
- NATGASUSJUL20 (Natural Gas) – While crude oil has been sent on the road to recovery, natural gas prices in the U.S. and Europe may stay under pressure during the coming months as stockpiles continue their seasonal build, potentially towards capacity. U.S. natural gas for delivery in July trade just above support at $1.60/MMBtu ahead of the March low at $1.52/MMBtu. Without a strong pickup in demand due to warmer weather or increased industrial demand, the short-term risks point to lower prices still.
- SPOT:xnys (Spotify) – shares up 10% yesterday in its biggest jump in seven week and the shares are now up 24% this month. The strong momentum is driven by the company’s latest signings of podcast hosts such as Joe Rogan and lately Kim Kardashian adding tailwind for the podcast business which is seen by investors as an important second business line to increase the overall profit margin.
- XAUUSD (Spot Gold) – Nine private banks spoken to by Reuters, which collectively oversee around $6 trillion in assets for the world’s ultra-rich, said they had advised clients to increase their allocation to gold. This at a time where the yellow metal has gone stale while struggling to break away from $1700/oz. Two of our main reasons for maintaining a bullish outlook: debasement concerns and lower real yields were highlighted in a Goldman Sachs not overnight. In it they raised their price forecasts for both gold and not least silver. They see up until now dormant EM demand showing signs of making a comeback as major consumers emerge from lockdowns.
- EURJPY – the EURJPY pair has sold off from its aggravated spike higher that was in part inspired by the EU’s move to launch a recovery package for the crisis funded from the EU budget that lifted existential concerns at the time. The pair has now sold off to exactly the 200-day moving average just below 120 ahead of today’s EU Council meeting, which could prove an event risk for euro crosses.
- GBPUSD and EURGBP – the market sold GBP despite the BoE nominally as hawkish as could be expected, although their guidance leaves them plenty of room for expanding QE down the road If that is necessary. At present the BoE is already buying more Gilts than the UK treasury is issuing. The technical situation for both GBPUSD and EURGBP is interesting, as GBPUSD has broken down to local lows, with 1.2355 area the last major Fibo support ahead of the sub-1.2100 lows and EURGBP is above the important 0.9000 level for the first time yesterday since late March.
What is going on?
- Trump stated in a tweet that “complete decoupling from China” remains an option as both the recent accusations from former National Security Adviser John Bolton’s book that Trump asked Xi to help him with re-election, and Trump’s bad slip in the presidential election polls bring the danger that Trump is willing to turn to China-bashing to revive his political fortunes.
- Covid19 concerns have shifted slightly to the back burner after China declared that a new outbreak in Beijing is under control although US numbers remain concerning in places.
- The Bank of England expands QE by 100 billion, which was at the lower end of expectations, although it did say that it “stands ready to take further action as necessary” and will keep the asset purchase programme under review. The comments on the economic outlook were more positive than at the previous meeting, with the meeting and the guidance about as hawkish as could be expected in the circumstances, but GBP nonetheless sold off. BoE Governor Bailey said that negative rates and yield-curve-control were not discussed at the meeting.
- The NY Fed Weekly Economic Index jump the most on w/w basis since the bottom in the last week of April. The indicator now has US economic growth at –8.4% y/y up from –11.5% at the lows. This indicates that economic activity is improving but still from low levels. The next couple of weeks become very important as new daily COVID-19 cases in some US states is potentially getting out of control.
What we are watching next?
- Today is “quadruple witching” – in which options on equities, futures, and options on futures expire. With the increasing popularity of using options to provide leverage and large open interest, today will see the third largest expiry of S&P options ever at $1.8 trillion, although the vast majority of contracts are “out of the money” if the index trades near current levels, making the expiry potentially less volatile.
- EU Council meeting today– This is the next important 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.
Economic Calendar Highlights (times GMT)
- EU Council Meeting (begins at 0800 GMT, but with press conference to follow later in the day)
- 1030 – Russia Central Bank Key Rate Announcement (consensus looking for a 100bp cut to bring rate to 4.50%)
- 1230 – Canada Apr. Retail Sales
- 1415 – US Fed’s Rosengren (Non-voter) to Speak
- 1700 – US Fed Chair Powell to Speak at Community Event
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