US equities rose again Friday, with the S&P up 0.9%. That came with a revival of sorts on US stimulus hopes, despite the US President shutting down negotiations earlier in the week; on Friday the President said he wanted a "bigger stimulus package … than either the Democrats or Republicans are offering"
Earnings season is kicking off and will provide investors with a corporate look-see at the real impact of Covid-19 on the S&P 500’s fundamental drivers, as weak and patchy sales growth and a collapse in profit margins should typify 3Q results.
Investors remain focused on the implications of a "Blue Wave" election, given that the probability of a Democratic sweep has climbed to 60% from 47% one month ago. But with much of the street thoroughly drenched in the Blue Wave, I would expect global drivers to reassert their influence, with the path of the global economic recovery, Covid-19 case counts, progress towards a vaccine, and broader trade issues.
The market remains zeroed in on optimism, focusing on a likely pick-up in government spending, most notably on infrastructure and "green" initiatives. However, it requires one to ignore the prospect of higher corporate taxes and also potentially massive shifts in the regulatory backdrop for some sectors, notably tech.
These elements point in vastly different directions for risk appetite and I expect "risk-off" to win out, in part because of timing. Changes to the tax code are likely to be implemented more swiftly than stimulus and infrastructure plans will be rolled out as state representatives will endlessly bicker to get their piece of the pie.
With the expected return of exogenous supply, and as short-term constraints begin to ease, oil is easing back to WTI $40 at the open as New York futures fell as much as 0.9%, having declined 1.4% on Friday.
Oil slipped as operations in the Gulf of Mexico began to resume following Hurricane Delta, oil workers in Norway called off a strike and Libya is taking significant strides to rejuvenate plans to restart production.
According to local drillers, Libya's Sharara field will initially pump 40,000 barrels of crude a day before reaching its capacity of almost 300,000 barrels in 10 days. The permanency of these barrels returning to the market will worry oil bulls and provide a nagging pain in the neck to OPEC.
Still, prices are gingerly pushing back ahead of WTI $40 as some oil traders are holding on to their US stimulus lottery tickets while taking some comfort in the notion that OPEC could extend production curtailment into 2021, nearer when a vaccine becomes available, that will kickstart global travel; the order of importance for the oil market recovery is vaccine first, US stimulus second.
With coronavirus cases accelerating in many countries, the cartel faces a dilemma at its next policy meeting starting November 30. Undoubtedly, OPEC will be contemplating the need to extend the current quotas into early 2021 rather than follow the scheduled ramp down of curtailments – this would help in normalizing global inventories.
All eyes on the Fix
The People's Bank of China signaled that the moves on the Yuan were too excessive after the PBoC said financial institutions would no longer need to set aside cash when purchasing foreign exchange for clients through currency forwards, effective Monday; previously, banks had to hold up to 20% of the notional aside when writing yuan-selling contracts (refer to Historical Context below).
This shift is much more benevolent than cranking up offshore Yuan funding rates, which has been the modus operandi in the past when the central bank is fussed about excessive speculation in the Yuan; at this stage, the shift looks to be an attempt to slow the move down instead of reversing the direction of travel.
Nonetheless, long Yuan positions were squeezed mercilessly at the Monday Wellington open as, in one fell swoop, USDCNH gapped from 6.69-6.73, dragging virtually every regional Yuan proxy along for the ride. As a keen proxy for G-10 traders that offers better liquidity than the CNH, the Australian dollar gapped lower around before recovering a bit.
There could be more short covering in spot into trading in London and New York later today as short USDCNH was a consensus trade (according to Reuters Asia FX polls). But I think this will eventually be an excellent opportunity to fade and re-initiate USD shorts towards 6.80 in spot as the USD dollar downtrend is universally expected to take hold under a Biden Presidency.
Still, up or down, it’s all happening here in Asia. Even with the low yielding part of the EMFX universe flying, it’s increasingly looking like Asia will be the starting point to any significant move lower in the dollar.
The USD/CNY fix after returning from the long holidays onshore in China has added to the momentum, even though many local Yuan traders were skeptical about whether it was meant as anything more than a 'non-signal' to the markets. I guess their concerns were answered over the weekend with the PBoC push back on the speed of the Yuan’s appreciation speed.
Still, the prospect of a Biden Presidency and hopes for a vaccine bode well for Asia, both in terms of a better outlook for trade and geopolitics and the growth-equity dynamic.
Like most regional peers, the Malaysian ringgit had been riding the strong Yuan and broadly weaker US dollar coattails. With oil prices trading lower at the open and the Yuan significantly softer, the ringgit could veer slightly defensive. There’s been no significant knock-on effect into G-10 from the PBoC intervention; any weakness in the ringgit could be bought as the prospect of a Biden Presidency and hopes for a vaccine bode well for the ringgit.
On the political front, a meeting between leader Anwar Ibrahim and the country’s king on Tuesday could go a long way to ensuring that his party has sufficient support from Malaysian lawmakers to form a government.
USD made fresh lows across the board on Friday in a one-way directional market. I think that once the street digests the PBoC’s push back, the USD will continue to make new lows ahead of the election.
In EURUSD, there are no real levels of consequence ahead of 1.1950-1.20. USDCHF has broken support at 0.9130 (uptrend, recent low, 55dma), and I don’t see it getting back above 0.9160 now. But USDJPY stands out to me as having not moved at all, yet given what gold and USDCNH (even after PBoC interventions) are doing, there’s a risk of another slip down to 104 area.
Back-end Eurodollar steepeners were popular last week. The risk with this trade is that, like any Fed-hiking trade over much of the previous decade, it’s turned out to be a bit of a premium cemetery. However, with the front end all but anchored, it’s easy to see why attention has focused on this part of the curve. The natural temptation is to look for higher rates.
JPY and US election weights and vols, in general, remain under pressure. With the 1m having rolled over the US election on November 3 last week, direct supply for election dates from the systematic sellers is not disappointing from a volume perspective. The desk saw some leveraged downside USDJPY plays, which are net suppliers of more downside vol to the market, so it looks like the election deviation will struggle to rally as we approach election night, barring some large swing in the polls.
It looks like the market has been given the green light to start accumulating gold again, after headlines yesterday suggested US fiscal stimulus talks continue; look to get XAU on dips to the 1900/1880 area if it makes it there.
Into the US election, I would expect that indications of more support for the Democrats should be positive for the yellow metal as a bigger fiscal stimulus package would become more likely in the event of a Democratic sweep in the US election. Increasing the dueling deficits would pressure the US dollar and simultaneously rekindle the next wave of fiscal inflationary impulses, primarily via infrastructure packages that could light a fire under commodity prices.
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With equity markets rising to fresh record highs in the United States and Europe, risk appetite is rising again