European equities brushed off the negative mood from the US market of late last week and managed a respectable rally yesterday as the US was on holiday. This morning, markets are mulling a fresh Trump broadside against China as he is clearly making a tough-on-China stance a part of his presidential campaign platform. The USD is close to breaking higher in many important USD pairs.
What is our trading focus?
- S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – with US equity markets back online following US Labor Day holiday all eyes will be on the Nasdaq 100 which led the declines last week. A large ‘gamma squeeze’ as we have explained here, here and here, was causing a technical declines and likely steep losses for many US retail investors speculating in weekly call options on US technology stocks. The big question this week remains whether US retail investors have the fire power and will to push Nasdaq 100 higher again. Nasdaq 100 has so far managed to produce a higher low compared to Friday’s session and the 11,548 closing from Friday in the future is a critical resistance today before further upside can be made.
- STOXX 50 Index (EU50.I) – European equities fought themselves above 3,300 yesterday and thus into the upper half of the 3,200-3,400 trading range that the market has been boxed into the last five weeks. The Sentix survey showed yesterday that the rebound narrative in Europe is still intact, but the recent severe surge in COVID-19 cases in several countries with France looking the worst could negatively impact mobility and economic activity again.
- EURUSD and USDCHF – we list USDCHF together with EURUSD because USDCHF has actually broken free of local resistance and is trading at a new highs as the CHF has weakened against both the EUR and the USD in recent sessions. The local trend-line support for EURUSD is effectively at the present price level this morning near 1.1800 and any shift below 1.1750 and especially 1.1700 over the ECB meeting this Thursday points to the risk of a more significant consolidation, though the structural uptrend would only begin to break down in EURUSD below 1.1500. For USDCHF, the equivalent level is around 0.9400.
- Spot Gold (XAUUSD) & Spot Silver (XAGUSD) – Gold trades softer with US-China geopolitical concerns (see below) being more than offset by the stronger dollar and rising US real yields after inflation expectations have been scaled back. An accelerated sell-off in stocks may pose a challenge with gold and silver becoming a source of liquidity to cover margin calls and losses elsewhere. Having broken the June uptrend, the focus will now turn to a band of support between $1909/oz (50-day MA) and at the recent low at $1903/oz.
- WTI Crude Oil (OILUSOCT20) & Brent Crude Oil (OILUKNOV20) – remains stuck near a two-month low with the difference in performance between the two benchmarks today being due to a Labor Day settlement mismatch. Rising Covid-19 cases around the world continue to raise concerns about the short-term demand outlook. To the list we can add the end of the US summer driving season, lower Chinese imports and a stronger dollar. Some focus today on whether US stocks will continue to stabilize following last week’s mini correction. Key support in Brent now at $40/b.
- AUDUSD – the bounce attempt in AUDUSD is so far uninspiring and this pair is our favourite outside of EURUSD for establishing USD direction. As noted before, Australia sits in a very awkward place geopolitically, with its external balances so dependent on Chinese demand, especially via iron ore and coking coal exports, while its security arrangements are very linked to the US and other allies. Any hitch in the reflationary narrative and a further weakening of risk sentiment could see a sizable consolidation in AUDUSD. The local focus is on the 0.7250-25 zone in AUDUSD, a break of which could open up for a test of the trend-critical 0.7000 area.
- Lululemon Athletica (LULU:xnas), Coupa Software (COUP:xnas), Slack Technologies (WORK:xnys) – are all reporting earnings tonight after the US market close. Lululemon has enjoyed the rally in US technology stocks despite being hit hard during the lockdown restrictions. Investors are betting on a strong rebound so the stock will likely be sensitive to any misses of analyst estimates. Slack is one of the work-from-home stocks that has not been impacted much by COVID-19 seeing revenue growth rate at 50% y/y in FY21 Q1 (ending 30 April). The company has been cash flow positive in the last two quarters so the company will have to remain profitable and sustaining its high growth rate.
- SoftBank Group (9984:xtks) – shares were down another 5% in today’s Japanese session at the lows but managed to climb back ending the session down 1%. Investors are beginning to ask questions about SoftBank Group’s new strategy with an investment arm suddenly engaging in options strategies. Read our primer on SoftBank Group here.
What is going on?
- US President Trump raises prospect of “decoupling” from China – in an address yesterday on US Labor Day, clearly staking this issue out as a part of his presidential election campaign platform. Among other hostile rhetorical points, Trump threatened to cut off any federal contracts to companies that outsource jobs to China and said that the US would hold China accountable for the fallout of the coronavirus pandemic.
- German Chancellor Merkel declares willingness to sanction Russia via action on Nord Stream 2 gas pipeline, although specifics area lacking. Still, it is the first time German leadership has expressed sympathy with the idea of cutting off this future important source of fuel for the country. Since the US vowed to sanction companies working on the pipeline, key contractors, especially a Swiss engineering firm, have halted work and delayed its completion. The Russian ruble is trading nervously, having traded at a new low since April against the US dollar.
What we are watching next?
- Brexit talks this week getting critical – the UK has ratcheted the pressure higher by possibly moving to override a portion of the Brexit withdrawal agreement that effectively established a customs border in the Irish Sea, which would move the customs border between Northern Ireland and the Republic of Ireland at the end of the Brexit transition period – which raises important questions for border checks if a free trade agreement is not agreed with the EU.
- ECB Meeting on Thursday – to what degree does the ECB believe it can engineer a higher level of inflation and what will have on offer at this Thursday’s meeting? More QE is very likely to extend the bank’s PEPP programme, while rate cuts are not seen as an option at the current policy rate. Something new and more forceful to encourage the flow of credit may need to be forthcoming to impress the market, and in the background, the real key is the pace of fiscal stimulus, which will likely need to pick up further to avoid a deflationary dynamic in Europe, particularly if the EUR continues rising. All the while, the strong EUR is keeping the pressure on the Lagarde and company to act.
- WASDE on Friday will be watched closely by the grain market following recent strong gains and rapid rise in speculative longs. The grain sector has seen strong gains during the past month with weather concerns, the weaker dollar (up until last week) and strong Chinese demand all having helped create a bullish backdrop. The combined speculative long in corn, wheat and soybeans sits 325,000 lots or 1.6 billion bushels above the five-year average. This at a time of year where funds generally tend to be net sellers given the lack of unknowns ahead of the arrival of the new harvest.
Economic Calendar Highlights for today (times GMT)
- 0730 – Sweden Jul. Industrial Orders
- 1000 – US Aug. NFIB Small Business Optimism
- 1900 – US Jul. Consumer Credit
- 0030 – Australia Sep. Westpac Consumer Confidence
- 0100 – New Zealand Sep. ANZ Business Confidence
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