Investor uncertainty is bristling ahead of an expected choppy period in terms of headline risk, where perhaps the most horrifying trouble of all is that the second wave of the coronavirus could trigger more intense lockdown fears. Still, the allure of the US stimulus deal is keeping the + 3500 (S&P 500 e- mini futures) dream alive.
How do you want to slice the short Euro trade?
EUR-USD dropped back to support at 1.17 as the news flow on COVID-19 highlighted additional headwinds' risk to growth, which will complicate life further for the ECB as it battles to prevent inflation expectations from becoming de-anchored
While a Brexit Deal felicitates a positive currency risk signal, I think the market will be more apt to consistently, at least until Europe's Covid curve flattens, pivot to the downside risks to Eurozone activity, which is rising sharply after the announcement of a six-week curfew in Paris and eight other large French cities from Saturday.
Although the government announced a further EUR1 bn in compensation to employers, damaging and long-lasting structural economic headwinds are building. In Spain, Catalonia became the first state to announce stricter measures since the first lockdown earlier this year by closing bars and restaurants for two weeks.
Risk sentiment captured d by the Eurozone's government bond markets points to increased risk aversion. The BTP spread is up 9bp this week to 130bp, while the 10y Bund yield has fallen to levels last traded in mid-March (-0.61%). Meanwhile, inflation expectations are waning. The EUR 5y5y inflation swap is down ~17bp from Aug. 11 highs. By contrast, US inflation expectations are within 1bp of the high of the last 16 months.
Also, the Euro is being undermined on the cross as traders sell EURGBP and buy GBPUSD dip on expectations of the Brexit deal.
But ultimately, in this type of environment, I would expect EURCHF downside activity to accelerate.
Or traders could make life easy and load up short USDJPY, which encapsulates the risk-off panacea succinctly despite Tokyo retail heavily on the reversion bid down to 104.50
The fall in oil mid-morning Asia is being chalked up to a decline in US oil exports and the omnipresent escalating coronavirus restrictions, which have cast a pall over the large draw in US crude inventories.
In a week dominated by virus headlines, global oil benchmark prices remained firmly anchored around the $40/bbl price point even as Covid-19 cases climbed again in the US and Europe ahead of what public officials have warned could be a winter of discontent.
Once again, China proved to be a colossal buyer of oil at $40/bbl, encouraged by the stronger RMB as the Yuan has entered a massive bull channel, and USDCNH is on a max downtrend.
Reflective of these competing narratives, we are pretty much mired in a bit of a range trade mentality.
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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