US equities rose again Monday, the S&P up 1.6%. Tech stocks led the gains, with the NASDAQ up 2.6%. And with US election polls showing a decisive lead for democratic candidate Joe Biden, the market continues to get its "MoJoe" on and also appears to be factoring in less chance of a contested election outcome, not to mention an increased likelihood of significant fiscal stimulus post-election. Whether those polls are reliable, of course, is another question entirely.
Stocks continued their relentless journey higher overnight, powered by tech and in particular helped along by Apple and Microsoft whose brands seemingly remain immune and entirely impervious to the pandemic.
Investors are increasingly relying on a massive fiscal stimulus package in the US to offset the flattening growth recovery. Still, tech stocks remain the apple of the market’s eye. And with Biden continuing to build on his lead in national polls, that same stimulus package should push USD lower, which should help nudge along the pre-election rotation into cyclicals.
The market's latest surge came as Wall Street appeared to mostly shrug off the latest signs that Democrats and Republicans are no closer to stimulus bliss, which would provide immediate aid to those Americans that need it the most amid an economy hobbled by a gnarly pandemic. But that could mean there’ll be less room for a cyclical catch up if a fiscal deal is smaller or even delayed.
While cash markets are gushing and reveling to a massive stimulus beat, equity derivative signals still offer up cause for concern that the result could be a drawn-out affair. However, positioning could arguably be more to do with hedging election day risk itself rather than the full out bear mode. Sill the November VIX future remains the curve's peak and is 2.2 points above October but has a narrower 1 point premium to December, which you’d have to think would implicitly be wider if markets expected a quick resolution.
With the market still trading off stimulus nirvana, it's inevitable –with the polls in the US leaning towards a Democratic sweep – there’ll be more scrutiny on Bidens tax proposals' impact on corporate America as we near the election date, provided the polls hold up. That pain is unavoidable and still to come.
In China, "channel checks" on property contracts and retail sales at shopping malls during the Golden Week holiday indicate better than expected consumer spending. Generally, contract sales during the holiday have been strong, running 20%-80% higher than last year, and some are up over 100% off a low base. Due to overseas travel restrictions and the long holiday (one more day than last year), retail sales at shopping malls are also healthy. Indeed, the stay-at-home or staycation-styled Golden Week in China will provide a most welcome boost to the services industry, which had been lagging in manufacturing in the post-pandemic recovery. Provided the Covid curve remains flat, clearing this major close contact holiday event should reduce the flu fear factor and give an additional shot in the arm to the mainland economy.
Third-quarter earnings get underway with the oddest of backdrops: the treasury yield curve is approaching multi-year highs on presumed fiscal stimulus with the possibility of a Democratic sweep. The virus has suddenly become an afterthought even as the winter months approach, and the Fed struggles to get its story straight, so what could go wrong?
Oil is down after a procession of short-term supply disruptions that buttressed prices have fallen by the wayside. At the same time, Libya is reported to resume production in the El Shahara oilfield; even amid ever-rising Covid-19 concerns, the Libyan oil supply's permanency is proving to be one of the biggest headaches for OPEC and oil bulls alike.
Still, oil prices remain supported by broader markets where hopes for stimulus resonate, which would provide a welcome relief to the US oil demand side of the equation.
Although Covid case counts are spiraling worldwide, markets do n’t seem overly fussed about the global recovery stumbling just yet. Full-on lockdowns are not being contemplated, while broader testing and vaccine progress leaves the world in a much safer place today; just ask President Trump, where oil markets are still digesting his rapid recovery.
The Baker Hughes rig count reported Friday shows only modest growth in activity (+4 w/w on the US oil side) and oil prices remain gingerly supported that US supply will disappoint through 4Q and into 2021, unless activity rates jump appreciably.
North Asian currencies were the biggest gainers last week, led by THB, CNH, TWD and KRW. This adds to an impressive run but it left them stretched and, as we saw yesterday, vulnerable to the PBoC push-back.
The market will be on yuan watch today after USDCNY surged higher into yesterday’s close, pulling USDCNH up by ~100 pips, which effectively nudged today's fixing gap over 100 pips. Still, the recent rule changes mean the PBoC doesn't want the yuan to appreciate too quickly. Hopefully, we can all agree that the PBoC's not-so-invisible hand will deal with the yuan cards until President Xi passes the deck to the open markets, whenever that should be.
I suspect local traders will be marking time, maybe for a few days, to better read the PBoC's intentions – even more so after yesterday's closing gap higher had intervention rumors circulating on the street.
Still, while the PBoC made it attractive to short the yuan, I guess my question is why would you want to short with growth and yield differentials still in favor? Especially at a historic time for China when President Xi is expected to lavish the market with all sorts of capital market reforms at China's plenum.
And traders will be on the lookout today as to whether Xi will announce possible reforms to the stock market in Shenzhen, which could foreshadow the event to unfold later this month at the party plenary.
The Malaysian Ringgit
As with most of the ASEAN basket, the ringgit’s momentum has faded in line with the weaker yuan complex. While the ringgit remains supported by vigorous "channel checks" painting a rosy staycation "Golden Week" in China, oil prices and variance in US election day risk continue to hold the ringgit back.
The Japanese Yen
There’s still a lot of stickiness in the USDJPY lower narrative, but the recent BoJ and portfolio flow data supports the stronger JPY thesis. The yen is a patience game but requires "nerves of steel" to hold on to the bullish JPY conviction when everyone says the USDJPY should go higher with a bear steepeners.
But old habits die hard in Tokyo as moves lower in USD/JPY has likely been held up to some degree by continuing past behaviors. For example, Japan retail investors have continued to exhibit the usual contrarian tendencies to buy up vast amounts of the dollar as USDJPY weakens. The mean reversion trade will likely continue to resonate, so long as local investors bank on super easy central bank policy. Tokyo's colossal retail FX community does adjust broader market behavior.
The British Pound
The pound's path of least resistance remains for the UK-EU trade agreement to be signed concluded by the end of October, which likely implies a decision to begin 'tunnel' talks this week. As such, I suspect the market is looking to get strategically short EURGBP, which could temporarily weigh on the Euro.
Although Covid case counts are spiraling in Europe, markets don't seem to be fussed about the global recovery stumbling just yet. Full-on lockdowns are not being contemplated, while broader testing and vaccine progress leaves the world in a much safer place today.
But, overall, if Joe Biden continues to build on his lead in national polls, the prospect of a massive stimulus package should push USD lower and increased expectations of a UK-EU trade deal should start to benefit the Euro on a catch-up play to the pound. The FX market vol skew should also sell-off into the November 3 election date where there’s still a large amount of variance in the price, suggesting there are more gains to be had in the currency markets.
Gold has stalled as the dollar, outside of the GBP, struggles for direction after the PBoC’s interventions. After gold broke $1,920 last week, the market is likely pricing in higher prices this week, with the $1,960-1,980 range in focus. The path of least resistance is to the upside.
News flow of late has been stimulus-on/stimulus-off, and current optimism over more fiscal aid has pushed stock markets and the precious metals complex higher. Gold's longer-term outlook remains bullish, with Covid-19 cases climbing, US-China tensions ongoing, and an eventual large-scale fiscal deal expected.
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USD regains ground on April inflation figures to outperform low-yielding currencies; EUR/USD meets strong resistance; Gold looks increasingly attractive