Tesla and Tech Unplugged | Daily Market Commentary with Jeffrey Halley
When I think of Unplugged, my memory returns wistfully to the MTV Unplugged series of the 1990s. About a Girl by Nirvana, still sends shivers of electricity down my spine. Alas, a three-day weekend did not lift the mood on Wall Street, with the only electricity available, being unplugged at the wall by investors, who continued dumping stocks, and technology in particular.
Tesla came in for attention after failing on Friday to find its listing Nirvana, being passed over for elevation to the S&P500. Tesla stock fell 21.0% overnight, although its theoretical rival Nikola (it’s not built anything yet), Nikola, rose 40.0% after an investment by General Motors in a classic case of alternating current. To give some perspective, though, Tesla’s stock price has increased by over 500% this year, so the last week’s meltdown of the charging point should be taken in context. Investors need to accept that that ride will be wild and sometimes resemble a demolition derby.
The rout was not confined just to equity markets. Oil suffered multiple well bursts with prices leaking in an uncontrolled manner. On currency markets, the US Dollar leapt higher with a number of major currencies, especially Euro, breaking significant supports versus the greenback. US bond yields also tracked slightly lower.
Pleasingly for precious metals aficionados, gold tested its range low near $1900.00 an ounce, but recovered to finish almost unchanged at $1931.50 an ounce. Given that previous equity market meltdowns had also seen precious metals get sold in lockstep, the disengagement will be particularly pleasing for bullish gold traders. I do suspect, though, that more downside pain may have to be weathered if equity markets continue South.
All in all, the price action across financial markets overnight looks very interconnected and classically haven seeking. The buy everything FOMO trade of the past six months has been more galactic then a Star Wars movie. Like any space opera, the baddies do get the upper hand at some stage in the film, before the good guys emerge victoriously and prepped for the sequel. The price action of the last week, continues to look corrective, if somewhat emotionally so. The underlying drivers of the buy everything rally, a global savings glut hunting for yield, bottomless amounts of zero per cent central bank money looking for a home and expected post-COVID-19 recovery of sorts in 2021 remain intact. So set the deflector shields to full and stay on target young Skywalker, the Force is with you.
Any data released today is likely to be swamped by the battle between good and evil on the world’s equity markets. China inflation data showed an easing of pressures this morning, YoY Inflation for August easing from 2.70% to 2.40% as commodity price pressure eased. That reduces one of the few worries about China’s recovery. In Australia, Westpac Consumer Confidence recovered to 93.80 from 79.50 in August, underling that Australia to remains on a recovery trajectory, despite the Victoria State lockdown.
Both the US and China increased the tit-for-tat rhetoric on Xinjiang and Taiwan overnight. Again, the noise from equity markets will subsume the geopolitical noise which markets are rapidly building herd immunity to as the known unknown and the new normal.
In pleasing news though, I asked my two Millennials, via their “devices” of course, if they had heard of the band Nirvana? I was fearing another Bruce Springsteen answer. I am delighted to report that both girls know Nirvana, although they are regarded as “old school.” Nevertheless, I will take the win. 2020 has been a dreadful year, but there is hope for the world yet!
Asian equities follow Wall Street south.
Wall Street returned from a long weekend in a belligerent mood overnight, sending stocks sharply lower. The S&P 500 fell 2.78%, the Nasdaq fell by 4.11%, and the Dow Jones fell 2.25%. Having led the rally from mid-March, big tech stocks were singled out for attention, leading the move lower overnight. With the democratisation of stock trading by online brokers, we should expect the higher participation by retail investors to lead to more incidences of herd-like volatility, just look at China where retail dominated flows.
The scale of the rally since mid-March means that at some stage a meaningful correction would, and could, occur. The price action of the past few session suggests that this could be that time. However, the search for yield remains in a zero per cent world, and I suspect the FOMO herd could change direction just quickly as it began. Key support levels are the 100-day moving averages (DMA) on the Nasdaq at 10,300.00, 3160.00 on the S&P 500, and 26,170.00 for the Dow Jones. All are somewhat distant still and only daily closes below them will call for a reassessment.
Asian stock markets are all lower today, but not by the same degree as the Wall Street sell-off. That trend has also been evident in recent times when Wall Street has rallied, Asia refusing to follow tick-for-tick slavishly. That suggests some resilience in Asian markets despite regional markets being in the red today. The injuries thus far look minor and not season-ending.
The Nikkei 225 has fallen 1,65%, with the Kospi down 1.0%. The Shanghai Composite has declined 1.60% and the CSI 300 by 1.30%. The Hang Seng is 1.70% lower with the Straits Times down only 0.50%. The more closely US-aligned Australian markets are lower by around 2.0%.
With no tier-1 data due in the US tonight, equity markets will be at the mercy of the whims of intra-day sentiment and headline bombs. Asia will remain on the back foot today, with Europe sure to follow suit as we await a turn in sentiment, or not, from Wall Street this evening.
The US Dollar recovery picks up steam.
The US Dollar was a notable recipient of safe-haven inflows overnight, the US dollar index jumping by 0.50%, closing on daily resistance at 93.50. Although unchanged today in Asia, the US dollar index looks poised to make further gains to 94.00 in the near-term as extended US Dollar short positioning versus the majors is squeezed.
The move higher by the US Dollar overnight has left G-10 currencies on very shaky ground. The EUR/USD fell to support at 1.1760, with further losses possible to 1.17000 initially. A daily close below 1.1700 implies a much deeper correction to 1.1400/1.1500 is possible. GBP/USD broke one-month support at 1.2980 on the way to 1.2955, on a double whammy of Brexit woes and a stronger Dollar. Its correction could now extend to its 200-DMA at 1.2700.
USD/CAD and USD/CHF have both broken out of down-channels with pro-cyclical AUD/USD and NZD/USD both falling by 1.0% overnight. Critical support for AUD/USD and NZD/USD lies at 0.7100 and 0.6500, respectively.
Tight liquidity from the PBOC and robust China data recently continues to support the Chinese Yuan though. USD/CNY has only risen slightly to 6.8500 in the past few days. The PBOC seems determined, via a series of firm CNY fixes, to limit the fallout of the Dollar correction. That has been mildly supportive for regional Asian currencies. USD/INR, USD/SGD, USD/MYR, USD/THB and USD/PHP have edged higher only modestly and have held onto most of their recent weeks’ gains. That suggests that regional investors believe the US Dollar correction to be transitory.
With sentiment able to turn on a dime now, the US Dollar short squeeze could end as quickly as it began. However, given the level speculative short positioning in the markets versus the G-10 majors, I suspect the Dollar correction in that space still has substantial room to run. In Sterling’s case, that may well be the new norm as financial markets rapidly reprice Brexit risk.
Oil prices collapse overnight.
Oil prices suffered a severe pipeline rupture overnight, as a falling stock market dealt a coup de grace to already weak sentiment driven by a supply glut, lower Saudi prices, OPEC+ compliance, and the end of the US driving season. Brent crude fell by 5.50% to $39.70 a barrel. WTI fell 6.0% to $36.70 a barrel.
The falls overnight leave both contracts just above critical long-term support at their 100-day moving averages. Brent’s 100-DMA is at $39.50 a barrel, with a daily close below that potentially extending losses to $37.00 a barrel. WTI’s 100-DMA is at $35.50 a barrel, with a daily close below that suggesting further losses to $34.40 a barrel, and possibly as low as $32.50 a barrel.
Given the severity of the move lower, I cannot rule out another large capitulation move more down as yet. However, both contract’s relative strength indexes (RSI) are now severely oversold and usually an excellent indicator of the end of extreme price moves. Further moves lower will almost certainly flush out physical buyers from hiding, and even allowing for all the negative factors above, prices look overdone down here. That said, they could look more overdone for a few days yet, but getting ultra-bearish on oil at these price levels may turn out to be a painful game.
Gold remains pleasingly resilient.
Gold prices fell with US equities initially, trading as low at $1906.00 an ounce in overnight trading. However, gold found plenty of patient buyers on the dip with prices rallying to finish almost unchanged at $1931.50 an ounce. The decoupling of gold from the equity market sell-off will bring cheer to bullish investors and rightly so. Gold has once again, held its daily support zone between $1900.00- and $1920.00 an ounce.
The question remains, however, if most of the resting buy orders were filled overnight, how much of that interest will be refreshed in the form of new buy orders today. If the answer is not many, a continued equity sell-off in New York could see gold move lower once again to retest $1900.00 an ounce.
That may test the yellow mettle of investors, and a deeper correction to the August low around $1860.00 cannot be ruled out completely. Channel resistance at $1977.00 looks quite far away at this stage as well, with gold unable to sustain rallies to $1950.00 in recent times.
Golds positive fundamentals remain intact over the medium to long-term. Investors may have to wear some pain before they see the gains in the shorter-term.