Investors may walk the next few weeks with caution - markets were overly consensus around a Democratic sweep and all that entails a more massive stimulus. Still, it may be difficult for markets to trend too far in either direction without an actual outcome at this point.
Risk assets are precariously perched with no shortage of uncertainty clouding the background, and with investors overzealously anticipating an immediate boost from China's economic impulse, a tiny bit of froth got immediately skimmed off the top of China's "lift-off" narrative as short term traders parse the good, the bad, and the ugly in the China data dump and have seemingly concluded that the Q3 GDP miss supersedes the consumption recovery at least for this phase of the trading day.
Keeping in mind that short-term markets move to the tune of data beats and misses versus market expectations. And a data miss can trigger a small divergence from the longer-term paths of least resistance. Still, with China's recovery in private consumption gathering momentum, it could go some way to alleviating the pain from the GDP headline miss.
The soft sell down in growth will likely be faded, but the market has bigger fish to fry that will probably hold sentiment in check.
US House Speaker Nancy Pelosi has indicated that the White House has less than 48 hours to push through a stimulus package before the election. Even if the deal is reached between senior Democrats and the White House, senior Senate Republicans are skeptical of a $1 trn stimulus, a much smaller envelope than the $2 trn discussed between Pelosi and Treasury Secretary Mnuchin.
Fed communication around the FOMC's commitment to low-interest rates is becoming increasingly wide-ranging and less dovish than the Fed Chair. For example, Vice Chair Clarida is not on Chair Powell's ultra-accommodative page. Last week, Clarida's comments on the US recession's brevity this year indicate a central banker who views the hurdle towards more significant balance-sheet expansion as being high. Meanwhile, Boston Fed President Rosengren told the FT that the Fed lacked sufficient tools to "stop firms and households" from taking on "excessive leverage" and called for a "rethink" on financial stability issues in the US.
A more hands-off Fed means the prospects of a pronounced bear steepening in the UST yield curve on a blue wave are higher if the Fed does indicate that it is willing to step in. If the Fed does not suggest that it is ready to step in to curb an aggressive UST curve bear steepening, a whole whack of stuff will underperform and not just high yielder FX and Gold, stocks could come off if the FOMC stops pumping air into their policy balloon.
Not too unexpected, the Yuan pullback on the weaker than expected China GDP prints has acted as a magnet to G-10 currencies as both the EUR and AUD weaken. It is impressive how the forces of gravity are shifting to the Yuan in the Global FX space.
Cable remains hopeful for a deal despite tough talk as Brexit negotiations have kicked into high gear again. And with that, so has public posturing and brinkmanship. But markets have become all too accustomed to these shenanigans by now and seem more willing to dismiss the noise as long as the sides are still talking, at least in private.
With increasing mobility restriction pushing EU yields to H2 lows, which were already being weighed down by excess liquidity, the EURUSD will continue to struggle to gain traction. The Yuan could still float the EURUSD, but with fast money trimming long Yuan positions today, the EURUSD could head towards 1.1675 on the Covid risk.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll