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Retail Investors Driving Short-Term Sentiment

Market remains highly volatile but selling does not seem to have the feel of a panic anymore.

Market remains highly volatile but selling does not seem to have the feel of a panic anymore. Expect this to be the case as retail investors seem to be driving the sentiment in the short term. With the Covid situation now seem to be increasingly worrying in Europe, and with colder weather impending in the northern hemisphere, the crisis is far from over.

Brace yourself for more volatility but the trends which work in the environment of incessant money printing will eventually work again.

TRADING PLAN

  1. Gold & Silver — Started the day strong and ended weak. 2 steps forward, 2.5 steps back. False start and back to consolidating. Be patient.
  2. AUD -

AUD/USD — Range of 0.7190–0.7200 and 0.7330–7340 for now.

AUD/NZD — Support at 1.0790–1.0800 held strongly and resistance at 1.0890–1.0900 breached. IF it holds above 1.0890–1.0900, expect higher levels ahead.

3. EUR/JPY — Stuck in recent range of 124.40–50 to 126.40–50. Back to middle of range after testing the high end of the range. After reducing near the top end of the range, add back some on the dip. Remain patient.

Key risks US equity market weakness and possibility of higher USD yields leading to strong USD.

WHAT HAPPENED YESTERDAY

Market Movements as of New York Close 10 Sep 2020
  • U.S. Initial claims for the week ending September 5 were unchanged at 884,000 (expected 813,000). Continuing claims for the week ending August 29 increased by 93,000 to 13.385 million. The Producer Price Index for final demand increased 0.3% m/m in August, as expected. The index for final demand, excluding food and energy, increased 0.4% m/m (expected +0.2%). That left the yr/yr changes at -0.2% and 0.6%, respectively. The soft year-over-year readings will overshadow the stronger month-over-month readings, because the year-over-year numbers play into the Fed’s view that it isn’t even thinking about thinking about thinking about raising rates.
  • Dollar clung to gains on Thursday after a rout in stocks sent nervous investors to safety, while GBP was poised for its worst week since March as British plans to break a divorce treaty with Europe rekindled the spectre of a no-deal Brexit. The EUR at first rose 1% to $1.1917 after European Central Bank President Christine Lagarde insisted the bank does not target the exchange rate. But her subsequent remark that the bank indeed monitors it, and its effect on inflation, together with a tumble in U.S. stocks, brought investors rushing back to Dollars and sank the EUR back to $1.1825, where it started the day.
  • S&P 500 fell -1.8% (Highs +0.47%) on Thursday in a broad-based retreat led by shares of technology and energy companies. The Nasdaq Composite declined -2.0% (Highs +1.1%), the Dow Jones Industrial Average declined 1.5% (Highs +0.48%), and the Russell 2000 declined -1.2% (Highs +1.0%).
  • The day started with the S&P 500 up 0.8%, and briefly surpassing the intraday high from the day before, on the back of leadership from the mega-caps and growth stocks which might have benefited from an underwhelming weekly initial jobless claims report, which was unchanged at 884,000 (expected 813,000). On no specific news, though, these stocks quickly turned around and the selling carried over to the broad market throughout the day.

HEADLINES:

REFORM HOPES RISE AS CHINA FOCUSES ON INWARD ECONOMIC SHIFT

Chinese reform advocates are hoping President Xi Jinping’s proposed new economic model, expected to be the centrepiece of a key conclave next month, is an opportunity to quicken changes to spur domestic demand and tackle structural woes.

The new development model will be discussed at a meeting of the ruling Communist Party in October, where policies are expected to be built into the next five-year road-map for the economy, policy insiders said.

Xi in May proposed a “dual circulation” strategy for the next phase of economic development in which China will rely mainly on “domestic circulation” — an internal cycle of production, distribution and consumption.

That will be supported by “international circulation”, in which China further integrates with the global economy, opening its doors to more foreign goods, capital and investment.

Few details have been published on the scheme itself, but economists and think tanks are proposing various reforms that they deem crucial to steering a more self-reliant economic course and building long-term growth drivers, they said.

Thematic Context: “As the old adage goes, “the enemy of my enemy is my friend”, in an increasingly polarized world caught in a Thucydides trap (US vs China) which could possibly split the world monetary order into two hegemonic zones,

Pro-china aligning with One Belt One Road initiative (commodities priced in RMB) and

Pro-U.S. aligning with Blue Dot Programme (commodities priced in USD),

we can identify the aligned factions via the existing and forming ideologies (i.e. Pro-U.S. = U.S., Australia, UK, Brazil, Japan and Israel, Pro-China = China, Africa, Russia, Central Asia, Iran).” — 21st June 2020

ECB SEES “STRONG REBOUND” SIGNS, MONITORING FX

European Central Bank President Christine Lagarde said on Thursday that data suggested a “strong rebound” in the euro area, with the economy contracting less than expected this year. The bank now expects GDP to shrink by 8.0 percent this year, better than the 8.7% contraction it expected in June. Inflation projections were little changed at 0.3% for this year and 1.0% in 2021. Lagarde said the surging EUR must be monitored for its impact on prices, but she didn’t signal any pressing need to adjust monetary policy (no need to overreact), EUR jumped to the highest in more than a week on the back of the news (+0.99%, 1.1918). However, Lagarde commented that the bank would “monitor closely” the currency’s strength (-0.88% from highs, 1.813).

Thematic Context: “ “This was their finest hour”, one of the greatest rallying cries of WW2 by Winston Churchill could be used to describe the historic feat pulled off by the Franco-German efforts. This may be the beginning of a renaissance in Europe and a watershed moment for the EUR. We believe a “Sputnik Moment” is nigh for the western world, especially when they need to rebuild a competitive economy to challenge the rise of China. European champions like Safran, Thales, Airbus and Volkswagen will be key to watch.” — 27th Jul 2020

NAVALNY’S CONDITION IMPROVING, POLICE GUARD STEPPED UP

Russian opposition politician Alexei Navalny has made further progress in his recovery from poisoning with a Novichok nerve agent and is now able to speak again, Der Spiegel magazine reported on Thursday. The Kremlin critic is being treated in Berlin’s Charite hospital after being taken seriously ill on a Russian domestic flight last month. Germany has demanded Russia explain the affair, though Russia denies any involvement.

Thematic Context: “Infrastructure supplying Gas to Europe is a huge topic in the energy world and Russia’s Gazprom and American Oil Companies sits at the top of it. This story is key to watch as it will signal the EU’s main geopolitical intent in the long run, affecting the trajectory of the EUR.” — 3rd Sept 2020

DAY AHEAD

  • U.S. CPI

The Federal Reserve meets next week, and investors will be looking for clues on whether the Fed will take any further action to push inflation higher. That is why the upcoming CPI data are so important. If inflation is indeed as resilient as forecasts suggest, that would diminish the odds for any more immediate easing measures.

SENTIMENT

FX

STOCK INDICES

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