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London Open: The dreaded Covid Fall surge is here, Xi in Shenzhen, KRW, and GBP views. + oil

Market Analysis /
Stephen Innes / 14 Oct 2020

As the UK government's new three-tier covid-19 alert system dominates media headlines, the US re-enters the Covid haze, and the much-dreaded fall/winter surge is here. As everyone predicted but prayed it would not happen, the US is now grappling with a new Covid-19 wave that all but bound to ruin any holiday optimism. 


While much of this surge has been built into the current market, Oil models, as most 2H20 views, would see prices in the $40-$45/bbl range just because of that effect, and indeed, this is what we are currently experiencing.


But the tail risk, which is too often devoid in the narrative, is how lawmakers deal with this surge, and the way consumers interact remains the wild card. While a return to draconian confinement measures is unlikely, the most prominent threat to the economic recovery is fear of the virus, not necessarily the soft lockdowns or social gathering restrictions. It is fear that could keep people hunkered down in their apartments until the curve flattens or the vaccine is available. It could sound a significant downbeat to the economy.



President Xi Bounce


In a speech in Shenzhen, President Xi reiterated China's plan to open the economy to focus on both capital market reform and technology. He noted that through the CCP leadership, technology had taken Shenzhen to a higher level. 


This is the frontrunner to the Party Plenary, where market reforms will be laid out thick and heavy. And should be very positive for risk so much so a grandeur CCP display could steal a bit of the  US election thunder, that's if the current election polls prove reliable.


Biden's presidency is still bullish for stocks and should deliver a weaker US dollar. 


Nonetheless, a Biden presidency and a Democratic sweep of Congress offers the prospect of a potent policy mix when allied with accommodative monetary policy and will be uber supportive for stocks.


Indeed, such an election outcome would likely nudge the Fed into providing more details around its average inflation targeting framework that could also prompt a step-up in QE if the UST curve bear steepens aggressively. Combined, these would be USD-negative and gold positive.


 In the meantime, downside risks to US economic activity are rising, consistent with increasingly negative data surprise indices and the resurgence in Covid. 


If there a time for stimulus deal to come through, now would be as good a time as any. 


Currency Markets 


The USD rallied versus G10 currencies following weaker-than-expected US core CPI for September, highlights the lack of broad-based inflationary pressure and the need for fiscal stimulus. The probability of near-term fiscal stimulus remains low after senior Democrats homed in on Paycheck Protection Program for small businesses rather than a broader package.



The Pound 


UK PM Boris Johnson and European Commission Head Ursula von der Leyen will discuss the progress of Brexit negotiations on Wednesday afternoon in Europe, according to Reuters. The two sides remain far apart on state aid rules, where the UK seeks more flexibility, and on EU fishing rights in UK waters.


Brexit negotiations are very much in the UK press backburner as the tabloids are much more focused on domestic social-mobility restrictions in the context of the government's new three-tier covid-19 alert system. 


Johnson had set the deadline for a deal as Oct. 15 - the starting date of the EU leaders' summit - after which he said the UK is ready to withdraw from talks. An agreement by Thursday is highly unlikely, as is the prospect of a breakdown in negotiations, so time to kick the can down to month end.


With GBPUSD holding up relatively well and front-end vol relatively contained, a breakdown in negotiations would represent the outcome of an unexpected trail this week. Meanwhile, Ireland's press report that several EU ministers have stepped up planning for the possibility of no deal, with France's European affairs minister, Clément Beaune, arguing that such an outcome is becoming increasingly likely.


The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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