Investors have remained cautiously optimistic that Congress will agree on fiscal stimulus measures aimed at the economy's most struggling parts. However, there are few indications a deal could be reached before election day.
The rise in equities came despite roadblocks to further near-term US fiscal stimulus that appear to remain firmly in place. Overnight, Senate Majority Leader Mitch McConnell suggested that Democrats insist on an "outrageous amount of money" while also noting the challenge of negotiations given the proximity to the election. Meanwhile, House Speaker Pelosi indicated Democrats would not support a stand-alone bill for airlines without a broader fiscal package.
It’s all but a minor roadblock for investors, so it seems, as the markets continue rallying on optimism that the package will get done, be it a piecemeal one before the election date which will bridge the gap or the more expansive post-election top-up policy boost. But, at the end of the day, investors are reveling on the ‘Blue Wave’ rally bus where the first order come November 5 will be to open up the stimulus taps, and stocks are rallying in kind.
The seemingly positive ramifications of a possible Democratic clean sweep in the US election continue to play out globally, with ESG/renewable name – as well as cyclical/infrastructure – plays continuing to outperform. Looking further out, the pro-fiscal / increased regulation narrative of a Biden presidency should prove to be supportive for European markets as investors sell out of tech/momentum names, given the heightened regulatory risk and switch into more infrastructure-exposed sectors/regions; I would exercise some caution at current levels, with a lot now priced into markets for a 'blue sweep.'
It's getting easier to understand why investors are moving towards pricing a win by Democratic candidate Joe Biden. On Wednesday, a poll published by Quinnipiac University put Biden ahead in two key states, Florida and Pennsylvania, by pretty insurmountable margins and clearly into Blue Wave territory.
Regardless of the election outcome, the president will be focused on getting the US back to full employment – and fast. In this modern era, the narrative could shift to increased deficit spending, higher long-end rates and higher inflation expectations. These macro factors support cyclical stocks, but it could be a bumpy ride as heightened volatility typically accompanies new market regimes. Ultimately the stimulus boost gives way to corporate tax hikes and market return focus on earnings.
While tracking broader markets on that same Blue Wave stimulus and reflationary impulse, the oil market took flight from a more sinister wave in the form of a life-threatening storm surge as a strengthening hurricane Delta has forced extensive shut-ins in the GoM.
Confirmation that Equinor would need to shut in its giant Johan Sverdrup oilfield if the current strike among some offshore workers was to extend to Oct 14 takes more barrels off the market, which is a welcome relief for an oil complex that’s struggling to rebalance.
Each year, Mexico rolls the dice and makes huge options bet on oil prices' future direction. It's so predictable that it has a nickname in financial circles — the "Hacienda Hedge" or the "Pemex Hedge”.
So it was that rumors started to circulate early in London that last week's oil market beat down was being compounded by the Hacienda Hegde. That partially explains the noticeably massive action on the options markets that I’ve alluded to in several recent market reports. So, with the weight coming off the options markets, the offer side of the market is a little bit cleaner and the news probably triggered a bit of a short squeeze.
Most currencies are in narrow ranges this morning as EURUSD FX vols have come off pretty aggressively overnight. The “risk-on“ narrative is probably keeping the EURUSD in check, despite dovish ECB rhetoric, disappointing data and continued increases in Covid-19 case counts in the Eurozone failing to dent the EUR.
With a week to go until the EU Council meeting on October 15 – a potential deadline for Brexit negotiations – GBP remains immune. Choppy headline-driven price action persists in GBPUSD. Given the back and forth rhetoric on Brexit as negotiations continue, headlines that the UK plans to walk away if no deal is seen by October 15 led to another selloff in GBP.
The Ringgit should trade on a more favorable tone today with both risk sentiment and oil prices taking flight overnight.
The US Dollar (feature currency)
I think the duelling narrative of risk on – where muscle memory suggests selling the dollar versus higher US yields where historical correlations tell one to buy the US dollar – is holding the Greenback in stasis.
Since March, the US dollar (based on nominal trade-weighted indices) has closely tracked US 10y real yields. However, the past week hints at a decoupling between the two series, after a ~7bp rise in real interest rates and a broadly flat USD since October 2, which kind of supports my views.
For higher yielders in Asia, a Democratic sweep of Congress polls would drive renewed steepening in the UST curve, accompanied by higher real yields which reduces the attractiveness of high-yielding currencies vol-adjusted basis.
Gold is trading higher due to stimulus expectations, but the yellow metal is getting held back by the prospects of higher US yields and the Euro offering little support for gold while trading below 1.1800.
While the Blue Wave stimulus deluge is favorable for Gold, the resulting US treasury curve steepeners not so much.
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Stocks soar, powered by first-rate earnings and a dazzling run of economic data; Gold plays catch as G10 falls flat while oil basks in the afterglow