TRACKRECORD DAILY
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TRACKRECORD DAILY

Overdue and Healthy Correction

However, market psychology is everything. Confidence is now shaken, though the dip should be bought, risk should be sized to last the distance should the dip go deeper.

Just when it looked simple, the markets got a timely reminder that if it was really that simple, everyone would be millionaires. The retail stock traders got a rude shock when the seemingly unbreakable stocks such as Tesla and Apple led the sell off.

There was no real catalyst for the sell-off, but much like really there wasn’t much reason for Apple and Tesla to rally in recent weeks just because they were doing a stock split. (Does cutting an apple into pieces increases its value?)

It’s an overdue and healthy correction, but the violence of it should be spooking policymakers and the FOMO crowd who joined the party late. Fundamentals this week remain pretty much the same as last week and we are only reaching the levels at the start of last week.

However, market psychology is everything. Confidence is now shaken, though the dip should be bought, risk should be sized to last the distance should the dip go deeper.

TRADING PLAN

  1. Gold & Silver -Tried to sell off together with equities, and if the market was overleveraged, the sell-off would likely have been more aggressive. Starting to trade more like a safe haven and the short term market is likely to be short hoping for a repeat of the recent massive washout.
  2. AUD -

AUD/USD — Support level is strong at .7250–60, and it’s being tested as the USD tries to strengthen on the weak sentiment taking hold in stocks. With increasing volatility, if support should be broken, position reduction is due. For now, it looks supported but much hinges on the equity market.

AUD/NZD — Next support is at 1.0790–1.0800 and resistance at 1.0890–1.0900. Long positions likely to have been cleansed by the recent sell-off. Remain patient.

3. EUR/JPY — Back to top end of recent range of 124.40–50 to 126.40–50. Trading surprisingly well given the aggressive equity sell-off. Market likely to have gone short as EURJPY typically goes lower when the stock market sells off aggressively. If stocks should stabilise, this will be creeping higher.

Stock market selling off aggressively in one day is sparking fears that this is the end of the incessant rally. Should it accelerate, position sizing needs to be adjusted for the increased volatility. For now, all eyes on the tech stocks as an aggressive continuation might lead to full-blown risk aversion. It’s good that US yields are coming off amidst the sell off. If bonds and stocks sell-off at the same time, that would be when things get hairy.

WHAT HAPPENED YESTERDAY

Market Movements as of New York Close 3 Sep 2020
  • U.S. Initial claims for the week ending August 29 decreased by 130,000 to 881,000 (expected 915,000), which is the lowest they have been since the week ending March 14. Continuing claims for the week ending August 22 decreased by 1,238,000 to 13.254 million. The U.S. ISM Non-Manufacturing index for August slipped to 56.9% (expected 56.7%) from 58.1% in July.
  • JPY remained surprisingly resilient in the midst of a huge risk-off move in stocks. The EUR tested below 1.1800 as the recent strong USD sentiment persisted earlier in the day, but news of France’s 100 billion EUR package helped it grind higher off the lows. AUD and NZD bore the brunt of the risk off sentiment stemming from the stock market.
  • EURJPY which typically sells off when risk sentiment is weak stayed surprisingly supported.
  • The S&P 500 dropped 3.5% on Thursday in an orderly retreat led by the mega-caps and growth stocks. The Nasdaq Composite underperformed with a 5.0% decline due to its greater exposure to these names, while the Dow Jones Industrial Average (-2.8%) and Russell 2000 (-3.0%) declined about 3%.
  • There were no macro catalysts attributed to yesterday’s steep decline, suggesting that profit taking and price exhaustion were likely factors in cooling off the market that many investors had described as overheated.
  • Separately, Chicago Fed President Evans (FOMC voter in 2021) was the latest Fed official to subtly urge lawmakers for more fiscal relief. Evans also suggested that economic activity might not return to pre-pandemic levels until late-2022 and doesn’t expect inflation to pick up soon.

HEADLINES:

FRANCE TARGETS GREEN INVESTMENT, JOBS WITH HUGE STIMULUS PLAN

France aims to spend 100 billion euros to pull its economy out of one of Europe’s worst slumps, under a fast-moving recovery plan that revives President Emmanuel Macron’s pro-business reforms with a greener tinge.

The $118 billion stimulus equates to 4% of gross domestic product, meaning France is ploughing proportionally more public cash into its coronavirus-ravaged economy than any other big European country.

Thematic Context: “This is an example of projects countries will embark on to build, engineer and innovate their way out of this crisis. This ensures the spigots of MMT will continue to flow. We continue to like Gold, Silver and Tech Supranational on dips and maintain our bearish bias on the USD.” — 3rd Sept 2020

GERMANY PRESSED TO RETHINK NORD STREAM 2 PIPELINE AFTER NAVALNY POISONING

Pressure mounted on German Chancellor Angela Merkel on Thursday to reconsider the Nord Stream 2 pipeline, which will take gas from Russia to Germany, after she said Kremlin critic Alexei Navalny had been poisoned with a Soviet-style nerve agent.

“We must pursue hard politics, we must respond with the only language (Russian President Vladimir) Putin understands — that is gas sales,” Norbert Roettgen, the conservative head of Germany’s parliamentary foreign affairs committee, said on Thursday.

Led by Russia’s Gazprom with Western partners, the project is more than 90% completed and scheduled to operate from early 2021, which could make it hard to stop. The project has split the European Union, with some members saying it will undermine the traditional gas transit state, Ukraine and increase the bloc’s energy reliance on Russia. The U.S. , keen to increase liquefied natural gas (LNG) sales to Europe, also opposes the pipeline and has targeted some companies involved with sanctions.

TRUMP ENCOURAGES SUPPORTERS TO TRY TO VOTE TWICE, SPARKING UPROAR

“Let them send it in and let them go vote,” Trump said in an interview on Wednesday with WECT-TV in Wilmington, North Carolina. “And if the system is as good as they say it is then obviously they won’t be able to vote” in person.

Trump campaigned on Wednesday in North Carolina, known as a battleground state because its population can swing either to Republicans or Democrats and play a decisive role in presidential elections.

DAY AHEAD

  • U.S. Nonfarm Payrolls

The consensus is for the US economy to have added another 1.4 million jobs in August, which would push the unemployment rate down to 9.8%, from 10.2% previously. That would still leave the unemployment rate just beneath its peak from the 2008 financial crisis, so even though this is a step in the right direction, there are still miles to go before the labour market truly recovers.

More importantly, this report will capture the mid-July to mid-August period, when infections were on the rise and several states rolled back their reopening plans, causing high-frequency indicators to lose steam. Crucial unemployment benefits also expired at the end of July, cutting off a vital economic lifeline for many US households, so it will be interesting to see whether all this impacted employment.

All told, the risks surrounding the dollar and stocks from this data set seem asymmetric, with a potential disappointment generating a bigger negative reaction than the corresponding upside one in case of stronger numbers.

  • US Equities

The key driver today will be how the US equity market performs. If the sell-off accelerates, the policymakers are likely to start getting jittery and try to soothe the market.

SENTIMENT

FX

STOCK INDICES

Market Observation (Click for more details)

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