US equities were weaker on Monday, the S&P down 1.6% following smaller losses in Europe. US10Y yields lifted 2bps. Meanwhile, discussions, deals and deadlines remain focal points for markets in the US and Europe.
Focusing on the US, a lack of progress on stimulus talks weighed on sentiment. On Sunday, House Speaker Pelosi imposed a 48-hour deadline for a stimulus deal ahead of the election. There’s been no progress so far, but talks will continue tomorrow – though it remains doubtful that the Republican controlled Senate will accept any deal.
Stocks have been fading all day ahead of the earnings storm with discussions dominated by stimulus (or lack thereof) and the election. As hope for a pre-election stimulus balloon deflates – and with stocks struggling to float on their own during a subpar earning season – exhaustion set in and the laws of gravity took over. And with no shortage of uncertainty overshadowing the markets, investors continue to tack cautiously ahead of the final presidential debate.
The theme of 'sell the news' also continued overnight with industrial earnings. Granted, we’re only a shred of the way into earnings season, but thus far we‘ve seen mixed to poor results getting hammered, especially where the bar is high and those stocks are at the high.
In the wake of China's GDP miss, the market might have lingering concerns about a slowdown in China's recovery from here, which could hamstring mainland stocks, among other global assets. Room for a further pick-up in credit growth may be limited, with TSF and loan growth as of September already surpassing the 2020 targets. Still, the PBoC may cut the LPR by 20bp and lower the RRR by 25bp by year-end to keep the overall monetary policy stance accommodative and support the local market into year-end.
The EU's chief negotiator noted that he "remains available to intensify talks" on the EU-UK deal, a gesture welcomed by the British after "constructive talks on Monday."
The markets remain caught between two interpretations: one is similar tactics to 2019, where the UK tries to excise final minor concessions and PM Johnson makes the last point in the domestic Brexit culture war, or two which is a genuine, principled shift towards a 'no-deal' Brexit. But, overall, it makes for a very uncomfortable landing zone.
Fed Vice Chair Clarida spoke overnight and reiterated the need for more fiscal support, noting that the economy – not a calendar – governs liftoff on rates and that the Fed has not run out of policy tools. But he did sign off by saying he’s in no rush to act, despite some earlier dovish hints. He says the virus has been disinflationary in some parts of the economy and inflationary in others. Indeed, this is one of the most influential FOMC members not exactly banging the drum for further easing, but perhaps a slight movement in the dovish direction from him.
A more hands-off Fed means the prospects of a pronounced bear steepening in the UST yield curve on a blue wave are higher if the Fed does indicate that it’s willing to step in. If the Fed does not suggest that it’s ready to step in to curb an aggressive UST curve bear steepening, a whole whack of stuff will underperform – and not just high yielder FX and gold; stocks could come off if the FOMC stops pumping air into their policy balloon.
Oil prices slid for the fourth consecutive day. And even as OPEC promises to be proactive, oil prices remain perilously perched, tottering on the Covid curve as a pre-election US stimulus package remains in doubt. Progress on that US stimulus and news on the coronavirus will set oil's tone in the next few weeks.
Still, as the winter of discontent for the oil market sets in, more Covid-19 cases and restrictions will weigh on activity. Indeed, this could create a gloomier oil demand outlook, which increases the chances of more long-lasting damage.
In the wake of the GDP miss, the USDCNH max downtrend has given way to caution and market concerns about a slowdown in China's recovery from here. By no means will the market turn bearish on the RMB, though traders might pause for cause to parse additional data from China.
EU market sentiment was a little less gloomy yesterday despite the virus case numbers still being on the rise, which likely caused some EURUSD shorts to cover as they were getting no joy below 1.1700; I’m sure there’s a top to this pivot here, with traders looking to sell ahead of 1.1800. But the EUR remains seemingly indifferent to ECB rhetoric, which continues to paint a more troubling backdrop regarding the outlook.
Cable remains mired in choppy headline-driven price action and we should expect this to persist for now. Given the pound's resilience to the somewhat negative news flow, optimism still reigns supreme, provided constructive progress endures.
With investors possibly taking stock of the recent China data, which was mixed at best, it could take a bit of steam out of local market inflows – especially as we near the US election risk. And with oil prices precariously perched on the Covid curve, it could be a cautious day for the ringgit.
No US stimulus, no bounce in gold. Even the with a weaker dollar that was offering support earlier in the day, that soon gave way to the US stimulus stalemate.
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Notable reactions show earnings still count; Markets higher in line with stimulus-before-election theme as stocks ebb & flow on the unwind and rotation swivel