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The Daily Fix: All flow in the EUR

Chris Weston
Head of Research
Jul 15, 2020
After the moves to shun growth and momentum seen on Monday, the bulls have stepped back in, or at least they have in US equities because if I look cross-asset there isn’t the same jubilation.

The Dow has been the superstar closing +2.1%, while the NAS100 closed +0.8% and S&P500 +1.4%. European equities closed lower, but given the moves in US markets and EU futures we should see these market open on the front foot when they come online. The extent of the move will be determined by how the Nikkei and Hang Seng track through Asia, but at this stage, we’re staring at a higher open for Asia.

Consider the close in Asian equity futures don’t take into consideration news post market that Moderna has seen positive signs of antibodies in its initial testing for COVID19 drug, and we’ve seen S&P500 futures spike 0.9% higher on the re-set (at 8 am AEST). I’d, therefore, expect Asia to unwind between 1% to 1.5% higher.

The NAS100 has seen good flow, although turnover through the cash session was 12% below the 30-day average and 14% below in the S&P 500). After a solid 2% drop on the open, the buyers have stepped back in and the tech index closed 3.1% off the lows. The bearish reversal seen in the Monday session was negated, with a monster hammer candle seen on the daily. In the S&P 500, we’ve seen 87% of stocks higher on the day, with energy (+3.6%), materials (2.5%), industrials (+2.1%) leading the charge.

Financials finished 0.7% higher (as a sector), despite both Citi and Wells Fargo closing around 4% lower, with much focus on the banks (if we also include JPM) putting aside $28b for bad loans in Q2 – A clear read-through on how tough things are out there in the US economy.

Interestingly, JPM had a solid session and actually recorded the highest quarterly revenue ever, with a massive increase in its trading arm, with FICC revenues increasing by 99%.

On a broad basis, the market continues to find support on pullbacks and that frustrates the shorts who need the bid to dry up and better trending conditions seen.

There have been no moves to speak of in US bond market, with yields between 2s to 10s closing up a mere 1bp, while high yield and investment-grade credit have barely moved either.

On the data side, we saw a solid improvement in the NFIB small business optimism survey at 100.6 (from 94.4), while US CPI as expected a 0.6% YoY, with core at 1.2% (vs 1.1% eyed). Neither release moved the dial too greatly.

Data aside, most of the focus has been on the raft of Fed speakers and notably Lael Brainard, arguably the central thinker on the Fed, maintaining a view that she sees substantial economic risk and a slow recovery, whilst further hosing down the notion that we’re going to see Yield Curve Control anytime soon – it begs the question will the market start to go after higher bond yields? I am sceptical, but if yields do rise then it has big impactions for growth equities and the USD too.

FX flow – EURUSD dominates

On the subject of the USD, we’ve seen good flow in the USD pairs, with the clear bulk centred in EURUSD, followed just behind in AUDUSD, which has again simply tracked US equity market. EURUSD now sits at the top of the range pushing 1.1400, and there has been a propensity to fade the rallies here with the 10 June high of 1.1422 in the market's sights. EURUSD 1-week implied vol has pushed above 8%, as traders sense movement in this pair and that seems fair given we see the ECB meeting tomorrow (21:45 AEST) and the EU council meeting that starts Friday and spills into the weekend.

The ECB meeting should be a low volatility event given the raft of measures announced in the June meeting, and given the ECB meetings are generally dovish affairs, the fact we’re not expecting much is in itself bullish for the EUR. The EU Council meeting could be a vol event though and while we see a low probability that we get a formal agreement on the EU recovery fund, the market is expecting a solid step forward for the fund to be agreed in August or September.

Also keep an eye on CAD exposures, with the BoC meeting playing though at 00:00 AEST. This is the first policy meeting with Governor Macklem at the helm and traders, while not expecting any new policy initiatives, will be working off the tone of his statement. USDCAD overnight implied volatility sits at 8%, with the market pricing 1.3651 to 1.3557 range on the day.

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