Asia Market: It’s US election day. Here we go…

Market Analysis / 7 Min Read
04 Nov 2020

Market highlights 

  • Festive "risk-on" mood may suggest markets are already surfing a Blue Wave
  • Shanghai stock exchange suspends Ant Group's A-share IPO
  • Might the call for deeper cuts be on OPEC’s table?
  • Plenty of room for calamity in gold

Pre-election market round-up 

 

It’s gripping action going into the election night and an implied move for the SPX +1.6 %. Value/cyclicals are strong out of the gate and still leading, but Mega Cap Tech and Momentum caught up quickly. 

It feels almost like a broader asset reallocation trade is evolving into equities out of bonds, with higher rates taking control as SPX breadth is very healthy now. Complementing the move, the DXY is lower, Crude oil is spiking, and gold is more elevated. But how much of a headwind higher yields will have on stocks might be the great unknown.

Pushing back against a contested election, President Trump's comment that he will not "play games" about declaring victory takes a softer tone than he has taken at some recent campaign rallies. On Sunday, former NJ Governor Chris Christie said that if Trump were to lose, he "is not going to be a guy who's going to sit there and not leave the White House. He will abide by the voters' decision I'm confident of that". While saying that Trump does think he is going to win, Christie said: "I think there also is part of him that knows that not leaving the White House, putting up that kind of stink in terms of peaceful transition, just is not the way he wants to leave."

Shanghai Stock Exchange Suspends Ant Group's A-share IPO

The Shanghai stock exchange has suspended Ant Group's A-share IPO on its Starboard, the Chinese exchange said on Tuesday, Reuters reports. It went on to say that Ant might fall short of the listing requirement of sufficient information disclosure. A dual listing in Shanghai and Hong Kong was postponed after Chinese regulators summoned Jack Ma and other financial technology giant executives.

I suspect this is regulatory pushback as the monopolistic risk associated with the amalgamating of tech and finance is still evolving and eating into the financial sector's revenues since slack regulation of tech giants worldwide can destabilize the current banking system. The tech behemoths can deeply discount transaction fees and existing financial institutions cannot compete on a level playing field. None of them have the technical wherewithal that would allow them to trim staff and reduce costs to accomplish more with less, similar to what the tech giants can do.

I think this could foreshadow things to come from governments around the word and might cause more profit taking on US tech giants.

What to watch today

  • Florida is a critical state for Trump to win as nearly every avenue to an electoral college victory (270 electoral votes) depends on him winning the state. A winner could be declared in Florida before the close of business in Sydney.
  • Should Trump win Florida, Biden still has several paths to victory and the next states to focus on will be Pennsylvania, Michigan and Wisconsin. If the race is close in Pennsylvania, it’s unlikely a winner will be declared today. In Michigan, it could take until Friday to process all the mail-in ballots. Wisconsin is likely to be available during the Asian time zone but may take longer.
  • Should Trump win Florida, the probability that we’ll be unable to declare a victor until the end of the week will rise materially if the states mentioned above are close.
  • Democrats need to net three seats regarding the Senate and win the Presidency or four seats if Biden fails. There are five key races to watch here: Arizona, Colorado, Iowa, Maine and North Carolina. There is a slight possibility that majority control could come down to Georgia's second seat, likely to be a run-off on January 5.
  • The main thing for market participants to keep track of today is the number of Republican seats that flip.
  • Democratic sweep is the most bullish outcome concerning getting a $2 trillion-plus fiscal stimulus package passed in Q1 of next year.

Crude Oil

Oil rallied over 4% today, helped by a weaker US dollar and gains in the broader markets. The oil-price rally started yesterday when it emerged that Russia was in talks with its domestic oil producers on a possible extension of oil production curbs into the first quarter of 2021. 

Today, Algeria said it supports a potential extension. Russia and Saudi Arabia are both in favor and already in talks, with other OPEC members pressing for adherence to their meeting on November 30. However, gains were capped by several European countries introducing new restrictions to limit the spread of Covid-19.

So, as we inch ever closer to a current quota extension into 2021 as the market base case scenario, might the call for deeper cuts be on the table? As unlikely as that seems due to economic hardship, some OPEC+ members feel from the current level of production curbs that negatively affect the top and bottom-line budgetary concerns. Interestingly enough, The OPEC Secretary-General says the next meeting (Nov30/Dec1) will "accelerate" the recovery in oil prices and noted that the upcoming meeting would be "one of the most important conferences in the history of OPEC," according to media reports.

The expectation for this week's DOA oil stock report is for a further build in oil inventories. With today's rally, spreads have tightened. The front WTI spread is back trading -$0.33 after touching a low on the initial selloff yesterday of -$0.45. The front Brent spread has tightened to -$0.43 from a low of -$0.54. The Dec20/Dec21 WTI spread remains wide, but the contango has narrowed back to -$3.25 from -$4.19. Gasoline cracks remain weak, below $7 a barrel, and remains a source of concern around refinery margins, while heating oil cracks have continued to strengthen to trade around $10 a barrel due to winter oil consumption expectations. 

Currency Markets

A festive "risk-on" mood may suggest financial markets are already surfing on a Blue Wave, with polling numbers sufficiently skewed to mean a contested election is unlikely.

The AUD is higher despite RBA easing and further tensions in relations with China. The RBA decision to cut rates to 0.10% from 0.25% was in line with consensus, and the expansion in the QE program by AUD100bn was also expected. Indeed, this market cares little about G-10 positive or negative carry with every central bank hugging the LBZ.

The AUD bounce may echo the realization in FX markets that what ultimately matters for currency risk is the path to securing growth.

Despite the uncertainty of today's US election results, some investors are hoovering up EM FX weakness. The positive spin on the EM FX outlook includes expectations of a fiscal deluge on a Blue Wave tsunami and a Covid-19 vaccine being around the corner.

There’s more commentary pouring cold water on the idea of an ECB rate cut as ECB policymakers debating whether to channel part of the upcoming stimulus via APP. According to Reuters sources, the PEPP is likely to remain the central element in the December stimulus package. This, however, is followed by comments from the ECB's Schnabel, speaking directly to Handelsblatt, indicating their analysis shows they could cut rates further without reaching the point where it’s no longer significant or damaging.

Gold Markets

The US dollar sells off a bit this morning more broadly, helping gold but without any other obvious trigger. 

It does feel like there’s plenty of room for calamity in gold, as the market is still very long and perhaps looking for a Democratic sweep, followed by quick fiscal stimulus. Any downside to that scenario could result in a knee-jerk reaction lower in the yellow metal, with a potential reassessment later. 

One concern for gold investors is that duration has been on the back foot, with a Biden win being the most likely scenario. Despite all the position squaring over the last few sessions, the consensus view seems to be towards higher rates and steeper curves, which is hard to disagree with as a fiscal package is an eventuality in either scenario. With central banks virtually "all in" and near the end of the runway, the big question is just how far the selloff can go. A move to 1% in US 10y yields seems like the obvious target, but what about 1.25%? 

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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