The US election will capture the world’s attention and, for the market’s indulgent concerns, the imagination of financial centers around the world which are set to roll out their election playbooks. Many are expecting a Democratic sweep, which is the key to unlocking Congress’s ability to deliver significant fiscal stimulus and benefit the US and global markets at a time of need.
There was a broad move higher out of the gate in US equities. Still, the activity in momentum/tech faded as the day went on. Given the stock market concentrations and narrow leadership, the overall tape always struggles to shift higher if tech doesn’t pull its weight as positioning into tomorrow's election has Big Tech regulation, climate-change mitigation and energy policies all in play.
Price action in global equities was very encouraging, as has been the case for a couple of days now, with the market taking additional lockdown measures in its stride.
There is likely some seller exhaustion given the recent de-grossing; still, the blue wave impulse is starting to emerge with Biden holding a clear lead in the polls.
Interestingly, price action in travel and leisure names is incredibly encouraging, suggesting lockdowns are, by and large, priced in and that the market is beginning to look through the temporary hit to demand due to limited lockdowns into the end of the year.
Also helping risk was better economic data (Chinese and European PMIs) and the relative lack of volatility in US election polls over the last few days, especially compared to the run-up to 2016.
Given that some significant macro hurdles appear to have been cleared in the near term, the set-up looks supportive, looking at positioning and broader macro risk indicators such as rates, which continue to grind higher.
Now we’re in the starting blocks to make the final dash to the most important event of the year, if not the next four years: the US Presidential and Senate elections.
The market will probably assume that if Biden takes Florida it’s game on for the Blue Wave, but the correlation between Presidential results and the Senate outcome is not 100% clear. Therefore, I would be wary of the first reaction if the Democrats lead in the presidential race. I will focus more on Senate outcomes.
When nothing seemed to be going right for oil markets – with traders dreading the ancillary oil demand effects of economic loss and a decrease in socialization resulting from Europe's fresh lockdowns denting road fuel demand and OPEC's October production estimates rising by 470kb/d in October, driven by Libya, Nigeria and Iraq – a veil of uncertainty around the OPEC+ month-end meeting was lifted after Russia's government is said to be in talks with local producers to extend the OPEC+ output cuts.
With the CBR in no position to defend the ruble through dollar intervention and unwilling to dip into their gold reserves – which they would probably prefer to sit in the vault collecting dust – the Kremlin has effectively stopped two gaps with one brush, defending oil prices and effectively intervening in the ruble’s precipitous decline after the Russian Energy Minister on Monday met with Russian oil producers to discuss the possibility of extending the OPEC+ production cuts by three months.
These are all positive for oil prices, although the reason these changes are being contemplated is that demand is recovering more slowly than initially envisaged, coronavirus cases are spiking again, Libyan production is ramping up much quicker than expected and, in Russia's self-serving case, to defend the ruble to avoid an even worse economic collapse from Covid-19.
But the real key to unshackle oil prices from scrapping the bottom of the barrel is having both Russia and Saudi Arabia singing from the same song page in a sign of unified support to defend oil prices.
The US dollar is trading softer this morning due to the upbeat tone in the global stock market, supported by robust economic data in Europe and China. And with election polls showing Joe Biden retaining a healthy lead in national polling and also ahead in many key battleground states, the commodity linkers are attracting some attention – even more so if the Kremlin can extend current production quotas into 2021 to defend the ruble.
For the most part, currency markets are in a holding pattern into the election, but there have been some decent turbulence pockets to fade, none more so apparent than the loonie.
The Canadian Dollar
The Canadian dollar is on an absolute ripper, supported by climbing oil prices and its blue wave appeal. After the USDCAD hit an air pocket up to 1.3370 on the overshoot slide in oil prices yesterday, the Canadian dollar has seen a big pivot higher. The loonie is typically a direct beneficiary of more robust US growth, and Biden's massive infrastructure splurge will flow into Canada via commodities, construction, and other building services. Over the past few weeks, the road to Blue Wave Nirvana has been tempered because the Canadian dollar is but an asset bubble sitting atop the Athabasca oil sands, where oil is quickly becoming an unwanted investment asset.
Higher equities, positive Brexit headlines and an upward revision to the UK manufacturing PMI have helped GBPUSD reversed earlier Covid-19 related losses.
Although off the lows, EURUSD remains close to the critical support at 1.1625 amid growing awareness of the economic challenge of Covid-19. In a similar fashion to GBP, the EUR has rallied a little on rising equities and an upward revision to the flash manufacturing PMI for October. Of course, the question now is where things move from here, given the increasingly stringent Covid-19 containment measures in place across the Eurozone and what a Biden presidency means for the Euro.
The ringgit should have a good day with oil prices rebounding as blue wave playbooks are getting rolled out. A Biden win is perceived to be the most favorable outcome for Asia risk, since it lessens a new trade war chance.
But local eyes and ears will be trained on Malaysia's central bank today which is expected, by a wide margin, to keep its key rate unchanged as political uncertainty and a resurgence of Covid-19 hang like ominous clouds above Malaysian capital markets. Still, unlike most Asian peers, the BNM has sufficient policy wiggle room from negative inflation. Simultaneously, there’s limited leeway for fiscal policy expansion after a record stimulus unleashed earlier this year, so it could be up to the BNM to do much of the heavy lifting for the economic recovery from here on. Next on tap will be the latest government budget for 2021 on Friday.
Gold's Next Move Rests On US Fiscal Stimulus
Gold is down over the last two weeks, which is understandable as the Covid-19 outbreak is getting progressively worse in Europe and most of the world, leading to renewed lockdowns.
It seems this is now somewhat priced into European equities, and there doesn’t seem to be much more room for risk reduction ahead of the US elections. The potential unlocking of another US fiscal stimulus package would be most flattering for gold.
With the blue wave impulse kicking in, gold remains in demand, supported by hopes for stimulus deluge triggering that could trigger an inflationary surge.
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With equity markets rising to fresh record highs in the United States and Europe, risk appetite is rising again