Asia Macro Morning: Another debate holds the market at bay

Market Analysis / 3 Min Read
08 Oct 2020

The Pound 

The drift higher in the GBPUSD spot since September 23 implies relative impunity to a lack of progress in Brexit talks between the UK and EU. I think that given where the world is now, amid all the political and economic chaos, traders believe a deal will ultimately go through or, at a minimum, the two sides continue to kick the can down the road.

GBP options have moved out from October 15-16 to November 4-6, suggesting that investors now see negotiations being pushed out. If no deal is reached by October 15, it’s increasingly likely that markets will switch to what such an outcome could look like in reality. While GBP is expected to sell off in that scenario, the magnitude of such a decline depends on the extent of co-operation between the two sides on issues such as aviation and security.

MOVE Index

Having fallen to all-time lows on September 29, the MOVE index is back to mid-June levels, albeit still low in a historical context. 

A progressively priced-in Biden presidency and Democratic sweep of Congress, via prediction markets and increasingly in the polls, would drive renewed steepening in the UST curve, accompanied by higher real yields that reduces the attractiveness of high-yielding currencies on a vol-adjusted basis.

Bonds

Nominals are likely to set the tone for the rest of the day, with a continuation of bear steepening. Breakevens opened up about 3bp higher on the day, and despite substantial selling in the long end of the curve, it continued to move higher, led by the back end. The 10s30s briefly steepened out before getting pancaked again after decent-sized selling of outright emerged after the initial push. 

I find it interesting that so many people think 30s are too rich, yet no one likes 5s here – even as equities continue to march full steam ahead. But this week's backup in rates has inspired a lot more vol trading, hence the knock-on effect into the VIX, rightly or wrongly. But to anyone saying higher yields will hurt the stock market at some point, that’s not how it usually works – higher yields at this point in the cycle signal reflation, not Fed hikes. Reflation is good for stocks. Higher bond yields are only bad for stock markets when you’re worried about the Fed hiking too much. But that’s a story for 2025.

FOMC 

The key message from the minutes of the FOMC's September 15-16 meeting was maintaining flexibility so that the committee need not pre-commit to raising rates on an overshoot. That suggests more definitive forward guidance is not likely any time soon.

On the monetary-fiscal policy mix, some officials indicated concern around insufficient government support; that can only have increased since the meeting, given the lack of progress on talks between the White House and Democratic leadership since the FOMC meeting. US Vice President Pence could offer insights into the Republican leadership's views on the prospects for near-term stimulus in the first VP debate with Kamala Harris.

Rock paper scissors 

Roshambo seems to be getting played out in the oil markets as the bulls are buying a lottery ticket’s bounce on $1,200 freebie while the bears lurk in wait, all too knowing that this check will only paper over a small crack while the colossal oil markets fissure continue to expand. And in the background, long term strategies are seasoning as the global energy transition unfolds. 

For more market insights, follow me on Twitter: @Steveinnes123 

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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