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Unsustainable Weakness

Another day of markets trying to sell off but could not really sustain the weakness.

16 Jul 2020


As of New York Close 15 Jul 2020,


U.S. Dollar Index, -0.26%, 96.00
USDJPY, -0.28%, $106.94
EURUSD, +0.12%, $1.1411
GBPUSD, +0.24%, $1.2582
USDCAD, -0.77%, $1.3509
AUDUSD, +0.47%, $0.7008
NZDUSD, +0.46%, $0.6572


S&P 500, +0.91%, 3,226.56
Dow Jones, +0.85%, 26,870.10
Nasdaq, +0.59%, 10.550.49
Nikkei 225, +1.59%, 22,945.50


Gold Spot, +0.23%, 1811.90
Brent Oil Spot, +1.28%, 43.61


U.S. Total industrial production increased 5.4% m/m in June (consensus 4.6%) following an unrevised 1.4% increase in May. The capacity utilization rate improved to 68.6% (consensus 68.3%) from an upwardly revised 65.1% (from 64.8%) in May. The key takeaway from the report was the stark disclosure that the index fell 42.6% at an annual rate for the second quarter as a whole, which was the worst downturn since the industrial retrenchment after World War II.

Currency markets were again contained in a relatively small range despite the gyrations in the equity markets. CAD outperformed on the day due to strong oil prices (Brent Oil Spot, +1.28%). In Bank of Canada’s meeting, it held its key overnight rate steady (0.25%, as expected). The central bank sees a long, slow recovery and will keep its quantitative easing programs in place until that recovery is “well under way,” Bank of Canada Governor Tiff Macklem told reporters after the decision. The central bank said it would leave interest rates on hold until the 2% inflation target is sustainably achieved, which it does not expect until at least 2023. Macklem later told Bloomberg the bank’s outlook implied its key overnight rate would likely stay at its effective lower bound of 0.25% for “at least two years.”

U.S. Treasuries finished mixed and little changed. The 2-yr yield declined one basis point to 0.14%, while the 10-yr yield increased two basis points to 0.63%. The U.S. Dollar Index declined 0.2% to 96.06. Risk sentiment revived in currency markets on Wednesday as progress toward a COVID-19 vaccine helped equities rebound and commodity currencies strengthen, pushing the dollar to a one-month low (95.770).

S&P 500 gained 0.9% on Wednesday in a choppy trading session following another positive vaccine update. The Dow Jones Industrial Average increased 0.9%, and the Nasdaq Composite increased 0.6% after being down as much as -1.50% (10,420.54) . The Russell 2000 outperformed with a 3.5% gain amid strength in small-cap cyclical stocks.

A reopening trade in which economically-sensitive stocks outperform was catalyzed by news that Moderna’s (MRNA 80.22, +5.18, +6.9%) COVID-19 candidate elicited neutralizing antibodies in all 45 participants in a Phase 1 study. MRNA shares closed higher by 7%, although they were up as much as 18% intraday.

It was also a rotational trade, as cyclical, value, and small-cap stocks outperformed at the expense of mega-cap technology stocks like Amazon (AMZN 3008.87, -75.13, -2.4%). The underperformance of these widely-held names briefly cut the S&P 500’s intraday gain to just 0.1%, but a buy-the-dip trade ultimately prevailed.


China warned British Prime Minister Boris Johnson on Wednesday that his decision to ban Huawei from the 5G network would cost Britain dearly in investment, casting the move as the result of politicised pressure from Trump.

Hours after Johnson ordered Huawei equipment to be purged from the nascent 5G network by the end of 2027, Trump claimed credit for the decision and said that if countries wanted to do business with the United States they should block Huawei.

“Now I would even say this is not only disappointing — this is disheartening,” Chinese Ambassador Liu Xiaoming told the Centre for European Reform, adding that Britain had “simply dumped this company”.

“The way you are treating Huawei is being followed very closely by other Chinese businesses, and it will be very difficult for other businesses to have the confidence to have more investment,” he said.

Thematic Context: “One man’s meat is another man’s poison. As the western world is pretty much aligned against Huawei (China) and are determined to compete, this resolve may prove to be a renaissance moment for European tech firms. Coupled with some semblance of greater European cooperation in recent months, 5G related companies like Nokia and Ericsson warrants a look.” — 15th July 2020

COMMENTS/IMPACT: We are monitoring what we laid out on the 15th of July 2020 (aforementioned comments). Should the resolve to compete suffice and an actual fiscal bill comes into effect to support the rebuilding of Europe’s/UK tech industry, then it will be very positive for the continent and its currencies (EUR & GBP). However, should the China countermeasures be strong in curtailing the economic interests of the UK, the GBP will suffer as having to worry about Brexit while having a bruised trade relationship with a major economic power such as China is not going to end well.


Citing China’s decision to enact a new national security law for Hong Kong, Trump signed an executive order that he said would end the preferential economic treatment for the city. “No special privileges, no special economic treatment and no export of sensitive technologies,” he told a news conference. Acting on a Tuesday deadline, he also signed a bill approved by the U.S. Congress to penalize banks doing business with Chinese officials who implement the new security law.

“Today I signed legislation, and an executive order to hold China accountable for its aggressive actions against the people of Hong Kong, Trump said. “Hong Kong will now be treated the same as mainland China,” he added.

China’s foreign ministry said on Wednesday Beijing will impose retaliatory sanctions against U.S. individuals and entities in response to the law targeting banks, though the statement released through state media did not reference the executive order.

Thematic Context: “A tit for tat move between the two biggest economies is not good as its reflective that neither party wants to back down and this might reverberate into economic sanctions and sabotage (i.e. U.S. making it hard for Chinese companies to IPO and pressuring funds not to invest in Chinese companies). Any escalation might put pressure on risk assets and this has to be monitored in conjunction with the virus situation, for markets might be spooked if both fronts take a turn for the worse.” — 14th July 2020

COMMENTS/IMPACT: We continue to stick to our aforementioned commentary and keeping an eye on any material escalation. Escalation would dent risk sentiment and hurt risk currencies such as AUD.


When asked about his recent remarks on the United States looking at banning Chinese social media app Tiktok, Pompeo said: “Whether it is Tiktok or any of the other Chinese communications platforms, apps, infrastructure, this administration is taking seriously the requirement to protect the American people from having their information end up in the hands of the Chinese Communist Party,” he said at a think-tank event.

COMMENTS/IMPACT: The tech sector is extremely sensitive, especially for U.S. markets. Should China decide to make it hard for U.S. tech companies to operate in the mainland, it will affect broad market sentiment as Big Tech (due to its large capitalization) drives risk appetite. Keep an eye on this situation. Again, risk sentiment will be affected by any escalation.


European Central Bank

The European Central Bank is expected to take a pause in its pandemic response and keep policy unchanged when it announces its latest decision later today. Having been the epicentre of the Covid-19 pandemic at one point, Europe is now one of the few regions in the world that has so far managed to avoid a resurgence. Hence, investors are growing more confident about the recovery of the euro area and President Christine Lagarde will probably echo this optimism in her post-meeting press conference. The question is, will the improving outlook be enough to prop up the EUR, as it’s becoming increasingly unlikely that EU leaders will be able to reach a deal on a fiscal stimulus package at this week’s summit.

For now, the key driver of markets remains the US equity indices.


OVERALL SENTIMENT: Another day of markets trying to sell off but could not really sustain the weakness. Unwinding in tech stocks continues as Nasdaq underperforms by almost a percent again. However, this is likely to be temporary as the way we live, work and entertain and educate ourselves continues to be changed. The longer the Covid-19 crisis, the stickier the changes will be.

Despite the increasingly dire situation in states such as California and Florida, the market remains supported. Gold and Silver look increasingly dangerous, and the break higher seems inevitable.


Stock Indices

Read Today’s Trading Tip here:



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