US

The Daily Fix: Bad news. But the bears want more.

Chris Weston
Chris Weston
Head of Research
Jul 16, 2020
Looking at cross-asset markets and I’d argue that US trade has been a small win for the bears.

That said, the S&P 500 has closed lower by just 0.3%, HY credit CDX is 5bp wider, while Treasuries are all of 1bp lower (across the curve) . The move in yields was limited by a 7.5% increase in June retail sales. Crude is down -1.1%, while the VIX is up smalls (+0.2 vols at 28%) and while the USD is up on a broad basis the DXY is +0.2%.

In terms of news flow, the bears would have liked to have seen more juice in their position, despite a further deterioration in US-China diplomacy (the US is considering banning travel to the US for any CCP members and their families). As well as a lot of scuttlebutt that Texas will announce a shutdown later today, with record fatality rates and the third day of 10k+ new cases.

There's also increasing focus on a Phase 4 fiscal package to be announced next week with Congress back from its two-week recess. Trump is once again pushing the notion of a payrolls tax, which won’t cut the mustard with Senate Republicans who see it as incredibly expensive. The art of negotiation is firmly in play, but the belief is we were set to see a fiscal package of around $1t, which would be aimed at aid to state and local governments, while payments to individuals will be rolled out but at reduced levels from what households have been getting.

A payrolls tax would be a bigger positive for risk assets as it is permanent and wouldn’t result in a fiscal cliff, which is of course what we’re debating now, not just in the US but in other countries such as Australia.

China expected to stabiles after yesterday’s liquidation

China’s equity market liquidation seems to be contained within the confines of the CSI300, A50 index and Hang Seng and has not spilt over into global markets, and it's still unclear what caused the 4.8% (3.3 Z-score) sell-off in the markets. Of course, we know the Chinese equity markets have been hot, but some have credited this move with a poor June retail sale (-11.4% vs -11.2 eyed). There was focus on Kweichow Moutai, a spirit manufacturer which has well traded of late, with the stock finding negative comments from the state media about alcohol being used for drinking and not for speculation, which saw the stocks close -7.9%, and this seemingly resonated across other well speculated names in the market.

Others have said there have been rumours circulating around a run on certain banks with savers withdrawing deposits resulting in cash shortages – at this juncture, we’ve seen A50 futures +1.1%, with HSI futures are up 74bp, so a brighter open is expected, although one questions if this allows funds to simply reduce exposures into better levels.

On a brighter note

We know the market remains sensitive to news of drug trials, and while we question how much is in the price, there is a buzz of excitement of the AstraZeneca/Oxford trial data which should hit the markets on Monday. US earnings are also rolling in and while BAC and Netflix won't inspire, the probability of a series of beats relative to a low bar is high, with some big names due to hit the tape next week.

We also see ‘real’ (inflation-adjusted) US Treasuries push ever deeper in negative territory, with 5s 3bp lower into -1.05% - the lowest levels since May 2013. The interesting factor is that lower real yields have failed to boost gold, which is -0.8% while the NASDAQ has closed -0.7%.

What is working is utilities, materials and staples. Value has emerged as the hot factor of late and that’s despite Bank of America weighing on financials, closing -2.7% and putting aside $5.1b for loan losses, taking the total from the banks for provisions to $32b. Netflix has also been smashed aftermarket, and that is reinforcing the notion that growth and momentum are in the dog-house, at least for now.

FX moves – all eyes on the EU Council meeting

With equities broadly lower, we’ve seen the USD gaining on a broad basis and more so versus risk and higher beta FX. My trading target on the DXY (USDX) was for a move to 95.80 and we’ve hit that, with EURUSD pushing to 1.1450, before what is looking like a clear fake-out. The ECB meeting came and went with little fanfare, although traders were better buyers of EURUSD post the Lagarde press conference, with the pair into 1.1442 before finding a wall of supply through US trade. Little was expected from the ECB given QE was expanded by E600b just last month, with the bank offering E500b in loans through TLTRO-III.

(USDX daily)

17_07_2020_DFX1.png

All eyes fall on the EU Council meeting for signs of agreement on the EU Recovery fund, although again expectations for a full agreement are low and we this reflected in EURUSD overnight implied vol at a lowly 6.98% - this currently prices a move in EURUSD on the day of 67-pips, although I’d expect this to increase as we head to the London open. If running EUR exposures, do consider a lot of the news on the EU meetings will play out over the weekend so there are gapping risks.

17_07_2020_DFX2.png

I am still holding my NZDJPY short trade from earlier in the week although the cross is going sideways, and I really need volatility to ramp up to put a better bid in the JPY. USDCAD is also on the radar, as we see the 200-day MA acting as a floor in price and therefore I will be watching for a break of this LT average or a move above 1.3647 to define my bias. GBPAUD is also one to watch, with trader defending 1.7900 with vigour – fundamentally and tactically I like this into 1.8200 in the near-term.

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