Market Quick Take - July 27, 2020

 

By Steen Jakobsen, Chief Investment Officer at Saxo Bank

 

Gold ratcheted sharply higher again overnight, reaching a new all-time high beyond $1921 per ounce, with silver notching a more than six percent gain at one point as well. This came amidst US dollar weakness and ongoing US-China tensions, though equity markets were steady overnight after the US Nasdaq 100 Index touched a three-week low on Friday. This week features a busy earnings calendar and the latest FOMC meeting mid-week.

What is our trading focus?

 

US500.I (S&P 500 Index)and USNAS100.I (NASDAQ 100 Index) – the tech-heavy Nasdaq 100 index closed at a three-week low on Friday and below its 21-day moving average for the first time since early April, though it did bounce well off the session lows Friday. The US S&P 500 index merely closed last week at a one-week low, though notably after having broken above the major 3,220 resistance line (the post-Covid19 bear market high). With a big earnings week ahead (see below), the technical situation looks pivotal here for these major US indices.

 

FB:xnas (Facebook) - Facebook is the first of the US mega-cap companies this week to report earnings – on Wednesday after the close. The company has sat out the recent leg rally leg of the big tech- and internet companies. The company is largely reliant on ad spending and is expected to report a sizable year-on-year drop in earnings.

 

DAX.I (German DAX Index) -as with the S&P 500 index noted above, the German DAX technical situation looks precarious here for the bulls as the recent rally above important resistance around 13,000 has now faltered, though a retreat below perhaps 12,500 is needed to bolster the bearish case here.

XAUUSD (Spot Gold) and XAGUSD (Spot Silver) - the price action in this precious metal rally accelerated again overnight, with a move to all-time highs in gold and silver ripping another 6% higher at one point overnight.  With this latest price action, the next obvious psychological focus is on the 2,000 level for gold, while the 25 dollar per ounce level is the next psychological marker for silver, still over 50% below the 2011 high from 2011.

EURUSD – the rally continued apace today, with the pair trading above 1.1700 for the first time since late 2018. The next technical level is the 1.1825 area, the 61.8% retracement of the sell-off from the early 2018 highs to 2020 lows.

 

AUDUSD – Forex traders watching the situation here should note that the Aussie is receiving less support from industrial metals prices, where the price action has stalled out, and risk appetite, as noted above is looking less supportive as well. Already, the AUD has reversed lower versus the Euro and the Yen, and it is rare in recent market action to see AUDUSD diverging for long, direction-wise, from an AUDJPY move. Still, seeing is believing for the bears, with the recent break higher still the dominant technical fact on the chart until proven otherwise (bears need a decline through the 0.7050-0.7000 to build a more structural bearish case).

 

What is going on?

Demonstrations across the US turning increasingly violent, with outright violence in Seattle that saw large numbers of arrests and dozens of injured police officers. A face-off between armed demonstrators and counter-demonstrators in Louisville, Kentucky saw no violence, but was a new development. US President Trump has sent federal offices into local districts, which adds to the risks of political confrontation, as many of the protest/riot hotspots are run by Democratic local leaders.

Second wave COVID-19 impact is rising, with the spike in cases in Spain even leading to travel restrictions and quarantine requirements for travelers returning to the UK from Spain. Hong Kong announced a shutdown of in-restaurant dining, China announced new local outbreaks, Japan is struggling with high case counts in Tokyo, and Australia is dealing with a breakout in Victoria.

What we are watching next?

The US Congress is set to look at the next round of stimulus this week, as the $600 per week of federal unemployment benefits is set to expire at the end of this week. The Republican party will make clear its proposal today, which is said to include an extension of weekly benefits at a reduced rate and a new $1200 stimulus check and other stimulus money, though with no aid to state and local governments, with the latter a particularly focus from the Democratic side. Risks to the US economy are mounting if the two sides remain far apart in a highly charged political season ahead of the November 3 election.

Major Q2 earnings reports up this week. Some of the biggest of the megacap US companies are reporting earnings this week, one of the heaviest of earnings weeks, with 180 of the S&P 500 companies to report. The most interesting batch of earnings reports rolls in on Wednesday and Thursday, with Facebook on Wednesday and Apple, Google and Amazon report after the close on Thursday. 

Escalating US public disorder risks – with new waves of armed counter-demonstrators, so called “Back the Blue” (pro-police support), and the involvement of federal police forces, not to mention many of the protests turning riotous and featuring out right acts of violence, the risk for a major mishap is rising that could quickly prove a watershed event with implications for the election, among other risks.

Shutdown risks linked to Second wave COVID-19 outbreaks – in Europe, second wave shutdown risks especially focused on Spain and the impact on tourism there, while India seems to be taking over in accelerating in the wrong direction from the US. The numbers this week are likely to indicate whether risks are stabilising in the US after local authorities and public awareness has reacted to the latest surge in cases.

US-China tensions escalating - the latest tit-for-tat was the US closure of a Chinese mission in Houston, Texas while China closed a US consulate in the southwestern Chinese city of Chengdu, while US Secretary of State Pompeo late last week delivered a speech calling on all “free nations” to rise up against Chinese “tyranny”. 

Economic Calendar Highlights for today (times GMT)

• 07:30 – Sweden Jun. Household Lending

• 08:00 – Germany Jul. IFO Business Climate Survey

• 12:30 – US Jun. Preliminary Durable Goods Orders

• 14:30 – US Jul. Dallas Fed Manufacturing Activity