US stocks floundered on Tuesday, pressured by a string of mixed earnings reports from a list of companies, from airlines to banks. Meanwhile, the Congressional stalemate over fresh US fiscal stimulus pressured several assets as both treasuries and the dollar climbed, while gold slid precipitously.
Anxiety over second wave resurgence of Covid-19 – which is now apparent in many major economies – is also clouding the view, where the question remains how activity curtailment measures feed through into economic and mobility activity. On that front, risk has also deteriorated as participants mulled the implications of another vaccine trial setback which sent shares lower and dented near-term hopes for a cure.
Despite two major US banks reporting better profits, prices fell for both. Smaller than expected loan loss provisions drove earning beats, but gnarly forward guidance from both was cautious, reinforcing the overwhelming narrative still driving sentiment: all roads lead to pandemic uncertainty.
Markets are starting to feel listless as investors continue to digest the recent run-up in stocks and whether things have extended a little too far, too fast in the short term. Tech exuberance should undoubtedly warrant some attention.
But I also think markets are drifting because the Biden-Trump market probability spread has settled into a range and investors may have finally caught up with pricing the chances of a Democratic sweep and the great "Blue Wave" fiscal gusher.
It feels like the easy money has been made in terms of the first leg of the pro-cyclical/fiscal Biden victory trade, with fast money in particular now positioned long. And with all roads leading to pandemic uncertainty, short term spec that was positioned for earning beats may have sold out to those lingering pandemic concerns.
China's insatiable demand for all things oil has temporarily buttressed the oil complex after prices jumped on a better than expected import demand from China. But China cannot carry this recovery alone; US demand needs to kick in.
But the data makes absolute sense: China is the only massive oil-consuming economy that can boast any semblance of a V-shaped economic recovery. Still, the recovery remains all too fragile, as reflected through gnarly news flow where a resurgence of Covid-19 is now apparent in many major economies. The question is how to control the spread and whether broader restrictions feed through economic and mobility activity –hence oil demand.
With coronavirus cases accelerating in many countries, OPEC faces a dilemma next policy meeting. Undoubtedly the cartel will be contemplating the need to extend the current quotas into early 2021 rather than follow the scheduled ramp down of curtailments – and this would help in normalizing global inventories. I suspect this view is helping current prices but most certainly offers a good backstop on dips.
There are a couple of simple reasons for the stronger dollar this morning. First, the German ZEW expectations were terrible, and after a long run of better forward-looking data implying higher PMIs, that has turned sharply lower. Given the rising Covid case counts hurting sentiment in the rest of the Eurozone, Germany was the only good thing happening. Now that’s gone as well, so the idiosyncratic EUR catalyst has evaporated.
More important to the dollar move has been US House Speaker Pelosi's forceful pushback of the stimulus negotiation, which has led to a sharp ~$30 selloff in gold and dragging other currencies with it.
The street's strategic and longer-term view has not changed at all. In anticipation of a "Blue Wave" washing up a lavish stimulus impulse, the first order of business is to sell dollar rallies that the macro accounts think is the right strategy into the election.
Since noon in NY, the USD has been directionless as traders try to find any meaningful catalysts for the next move. This suggests things are a bit less sure today as locals will likely take their cue from the yuan. Indeed, the RMB has a huge footprint on G-10 these days.
The British Pound
If sufficient progress is made on talks this week to extend negotiations, GBP markets' focus could increase immediate economic concerns. These risks are firmly tilted to the downside in the context of tighter proposed social mobility measures in swathes of Northern England in a three-tier Covid-19 alert system. That’s not to mention the odds of the BoE going below zero continue to increase.
The Australian Dollar
The risk beta Australian dollar is trading near one-week lows as the chances of a near term US stimulus deal fade.
Although the market remains in yuan's watch, traders took comfort that yesterday's fix was nearly in line with expectations. The street then calked up the move above 6.75 due to higher funding and not an overt attempt by the central bank to drive the yuan significantly weaker. Still, the PBoC’s past propensity to lean into the wind might continue to tame the yuan's bullish ambitions – at least through the China plenary and possibly the US elections.
Still, I have no idea why you would want to short the yuan. Even though it remains pegged to a degree, growth and yield differentials make it a pretty decent bet as the yuan is the only currency that’s backed by an economy displaying any semblance of a V-shaped recovery. But I’m sure we are all keeping our eyes on the "shy Trump" vote.
Most of yesterday's focus on the ringgit was idiosyncratic as Malaysian opposition leader Anwar Ibrahim met with the king yesterday to prove he has enough parliament support to lead the country, which would go a long way to lifting the lingering political clouds hanging over Malaysia's capital market. The market received the meeting well, hence the ringgit improved into yesterday's close.
With oil price firming up a bit on China demand and yuan trading stronger this morning, I would expect the ringgit to trade more favorably on these impulses. Yet, momentum will likely be held back by the lack of US stimulus, which has driven investors back into the US dollar.
Precious metals were hit hard by the dollar's move higher overnight. Gold broke below $1,900, with stops being hit on the move lower, about 10k lots traded on the first leg down in the futures. Scaled-down Chinese buying was noted on the dip and is still on the bid. The move came in concert with pushback by US House Speaker Nancy Pelosi on an "inadequate" stimulus offer from the Trump administration of $1.8 trn.
It’s hard to rationalize gold's over-reaction to the stimulus pushback as the backdrop hasn’t fundamentally changed. Value seekers have reacted below $1,900 as we see strong leveraged buying on the dip.
Volumes seemed to be entirely driven by Comex liquidation. It wasn't one "sweep" or stop out that caused it – just a lot of liquidation between 13:40 and 14:20 London: 36.5k lots changed hands (3.6mio oz) cumulative volume on the Comex active gold contract as of 17:30 London stood at 225k lots, far outstripping the seven-day average of 156k lots.
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower