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The Daily Fix: Huge volatility in tech right now

23 Jul 2020
For those who focus on news, we all become political analysts over the coming 24 hours. Well, we can extend that to next week - as that’s where the key fiscal deadlines reside – the expiry of certain US fiscal stimulus measures.

US fiscal negotiations in play

Headlines are making their way around the traps that Chuck Grassley, the GOP Senator for Iowa, has detailed that a Phase 4 stimulus bill will not be ready by Monday. Now, that may or may not prove to be true, and who knows? The GOP may cobble something together in upcoming trade, but if a draft is crafted by Monday then it makes the passing through Congress seemingly a high hurdle. Next, consider what has been loosely proposed already, with the REPs stimulus proposal close to $1t, while the DEMs are closer to $3t. So while a payrolls tax cut has been withdrawn there’ll be some serious consolidation to get to an agreement.

I had argued that a failure to have an agreed deal to extend benefits would lead to higher vol and risk aversion, and that may still be the case, but we need to consider the Enhanced Unemployment Benefit most pertinently. The two plans need to converge quickly, with the DEMs wanting a straight rollover of the $600 p/w in benefits, while Mnuchin has proposed a plan on the REP side that equates to 70% of wage replacement.

This most likely takes the benefits to a run-rate to $188 or $310 p/w (source: CNBC). Naturally, the concern is that a failure to get this away will impact consumer sentiment at a time when US data is starting to miss the mark. While there are divisions, one suspects there’ll be an agreement of sorts soon on this policy.

Impacts of US-China relations

The next consideration that is impacting risk sentiment is US-China relations. My view has been that as long as tariffs are not being debated and seriously threatened as a weapon, then we need to get used to tit-for-tat measures ahead of November. However, there’s no doubt that when headlines broke in the South China Morning Post in London trade that the US Consulate in Chengdu was to be closed, we saw USDCNH reverse higher and S&P500 futures start to crack dragging the other markets down with it.

(Source: Bloomberg)

We look into Asia trade today, with the equity markets eyeing a weaker open and on full alert for Chinese retaliate measures. The Global Times editor, Hu Xijun, detailed in a tweet that China will announce measures today (Beijing time). It won’t be shocking if we hear that the Chengdu Consulate is to be closed, but there’s been speculation we could see closures of consulates in Wuhan and HK too. 

US data was not as bad as feared

Some have attributed the moves to a rise in the weekly jobless claims to 1.41m, although looking at the markets there was no initial reaction. Continuing claims fell to 16.19m (from 17.33m) so it’s not clear if the claims were actually that negative. That said, if I look at the Citi economic surprise index, it’s rolling over – and that highlights that economic data is missing the mark. Again, that could be a headwind for risk.

(Source: Bloomberg)

In terms of market moves, US equities have found sellers easy to come by, with the NAS100 falling from the get-go of the cash session to close -2.7%. Microsoft has been at the heart of the move, with earnings not blowing the lights out – which is what needs to happen when you’re priced to perfection.

Tesla closed - 5%, with price reversing 10.5% intra-day. Apple also lost 4.6%, while Amazon closed -3.7%. Leadership gave up today and the NAS has been crushed, but to be fair we question whether the news mentioned above was really that bad or different from what we’ve been used to. I’m not so sure, although it certainly hasn't helped that US real yields are 4bp higher.

The 30th of July will be huge for those trading the NAS100, with 36% of the index reporting earnings aftermarket.

My constructive stance on the S&P 500 is certainly looking shaky, although price is still holding the June high of 3232. A move through here and I’ll move to the sidelines for now on that view as it feels there could be more in this.

USDCNH is front and centre today, with price printing a fairly chunky bullish outside day yesterday and if this drives higher then it’ll likely deflate the AUD and NZD, which is playing out here. NZDJPY just failed to print a bearish outside day just off the June low, but still one that I was stopped out of recently and continue to see downside risks of.

The higher beta FX plays – MXN and BRL – have lost ground vs the USD, with the NOK getting hit with Brent crude -2.4%. The funding currencies – EUR, JPY and CHF- have outperformed.

The USDX is now right on the March lows, and if the USD is going to bounce then now is the time.

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