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London Open: You can see why investors may want to consider booking some profits on the uptick

Market Analysis - 2 Min Read Stephen Innes | 08 Jul 2020

Carrying on from this morning’s profit taking snowball effect

Investors are trying their best to look through the knotty Covid-19 economic entanglement. Still, you can see why they might be more prone to booking some profits on upticks, given that uncertainty around several issues that appear to be increasing. Aside from the virus, you still have the uptick in US-China tensions as viewed through the lens of the HK peg, And while Brexit continues to simmer, investors still have the US presidential election to contend with.
The market might be able to look through part of that weakness, but when you get warnings from Fed officials that the recovery may be leveling off, if anything that should make some sit up and take notice. 

US dollar is essential

Investors need to watch the US dollar more so now than at any time this year. The range-trading US dollar suggests investors are not convinced about an economic recovery that would justify exports rising in current account surplus countries.

But, locally, we may also need to factor in the likelihood of US dollar intervention. So, while a weaker USD is attractive vs. EUR, KRW and CNH, shorts are starting to look more attractive at current levels vs. EUR rather than KRW or CNH, where a possible central bank intervention response could match sensitivity around the recovery in exports.

Bloomberg reports that White House aides continue to weigh proposals to undermine the HKD currency peg to the US dollar. Here’s why I think this is a bad – not to mention unlikely – move:

  • First, direct US action against the peg could trigger China's response by pulling US assets, including USTs or equities.
  • Second, such a move could destabilize USD pegs elsewhere, including US allies around the world, especially those in the Middle East. 
  • Third, the unthinkable instability that it would trigger in the USD-based global financial ecosystem could drive a selloff in US equity markets – an outcome abhorrent to the White House ahead of the November presidential election.

Oil market

Asia traders appear happy to see the gasoline inventory drops while, for the most part, they continue to look through any possibility of widespread lockdowns.

Still, with market staring down another headline inventory build, price action could be capped as WTI $41 could be a bridge too far ahead of tomorrow's definitive government inventory report. But traders could also be taking solace that the Energy Information Administration raised its price outlook for Brent crude for the second half of 2020.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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