With investors peering down the stimulus wishing well, US stocks have remained perilously perched but onside for the day. The hope is that Congress will reach an agreement on a spending package to brace American households and businesses against the economic fallout from the pandemic, as a third coronavirus surge has taken hold across much of the United States.
With about 1 million people now tested on many days, the country is getting a far more accurate picture of how extensively the virus has spread than it did in the spring, and for market concerns it’s not painting a favorable image for the year-end economic outlook. The absence of a stimulus package would most certainly see US economic growth on the back-foot heading into year’s end and could drag stocks and growth assets down the Covid vortex as well.
Value is leading the US equity market rally on Tuesday as stimulus and vaccine headlines push travel and the reopening trade higher. Overall volumes are again very light, suggesting that many investors are choosing to watch the "on again off again stimulus romance" from the comfort of the sidelines – so it doesn’t take much to move this tape. At times, given the lower liquidity profile, it looked like investors who ran with the bulls were unceremoniously forced to ride the cutting edge of a continually reorienting whipsaw.
Indeed, it was a day of multi-asset whipsawing, but also one at times laced with hope: House Speaker Pelosi indicated that a pre-election stimulus deal is "possible" and struck a softer deadline tone as well, noting that for a stimulus bill to be voted on before the election it needs to be finalized by the end of the week.
In such gnarly times, deadlines are meant to be broken if constructive progress is occurring. Provided both parties are talking, if there’s a will, there’s a way and the political calculus allows for a pre-election deal. After all, what politician wants to be painted as voting for unemployment?
It feels like there’s a constant wall of money and even a systematic bid now, with rates also higher, aiding a bit more rotation into cyclicals and value as investors continue to look beyond the election towards a post-vaccine environment – this after AstraZeneca's highly touted Covid-19 vaccine trial in the US is expected to resume as early as this week.
The consensus might be that one should increase cyclical exposure, but positioning is not quite there yet as a speculative trade is not large because the event risk around the election is so significant. The outcome's timing is not precise as perceptions are still blurred by 2016 when polls were wrong on Brexit and US President Trump. Indeed, worrying about inaccurate polls feels like it’s the market’s final mind war. Then again, US election polls have only been wrong twice sine 1952.
The Blue Wave result has clear implications for a lower USD, and most believe it to be bullish stocks (where spending outweighs tax cuts). The market has bet on this outcome a bit but wants to bet much more. Out of all the various possible election outcomes, this is the only crystal-clear outcome for how asset markets respond.
If one growth asset remains tethered to the end of the stimulus yo-yo string, it has to be oil.
Crude prices surged to a seven-week high on signs that US lawmakers are nudging closer to a stimulus deal, only for momentum to get sapped after the API data indicated that US oil stockpiles rose last week bearish to consensus. Still, distillate inventories were down by about 6 million barrels, which could offset some of the headline gloom.
And bullish for oil markets, AstraZeneca's Covid-19 vaccine trial in the US is expected to resume as early as this week after the US Food and Drug Administration completed its review of a severe illness, four sources told Reuters. AstraZeneca's large, late-stage US trial has been on hold since September 6, after a participant in the company's UK trial fell ill with what was suspected to be a rare spinal inflammatory disorder. The positive vaccine news will be perceived as great news for oil markets.
While the overall economic outlook remains challenging for oil, there is hope that the second Covid wave (third in the US) will be less severe and an economic double-dip avoided. And, based on that view, this seems to be the favored approach by OPEC+ as JMMC did not address whether the producer group might extend current quotas into 2021; this isn’t the role of the JMMC, but the market was on the hunt for any excuse to sell.
Still, OPEC has set a clear precedent. It will likely take another proactive approach to manage oil markets, both at OPEC+ group level and through the individual actions of critical producers like Saudi Arabia. If the ramp-up of Libyan production and the pace of the global demand recovery is a problem for the oil price, recent OPEC intervention activity suggests there’s a strong chance they’ll react.
The US dollar is trading lower on hopes for a US stimulus deal before the week is out and currency traders are still holding tight to their stimulus lottery ticket.
But this is a market that desperately wants to be short USD on a Blue Wave but has only acted mildly due to election uncertainty, compounded by Covid’s spread in the EU and dovish ECB perceptions. The USD bear view's main driver is the US fiscal story (past, present and future). Beyond the Brexit machinations, I suspect this is driving some idiosyncratic bullish momentum on some currency markets. There are some significantly chunky single orders reportedly going through the EURUSD in London hours over the past two days.
The Chinese Yuan
The yuan continues to strengthen due to its superior economic backdrop, relative to other currency trades, and sets it at the top of the macro heap. The better retail sales data for September continues to resonate and signals that domestic demand is holding up. Simultaneously, the lack of short dollar viable alternatives is likely to keep people in the trade, with the upcoming US-election, rising Covid cases and restrictions in Europe, and GBP experiencing Brexit-related volatility (more on that below) deterring risk-taking.
The Malaysia Ringgit
The ringgit could trade with a more favorable beat, supported by oil prices that are not ready to buckle to Covid when US stimulus hopes remain alive and OPEC+ still has an unswerving commitment to ensuring oil prices shift aggressively lower. Also, the yuan continues to trade well, supported by a surging consumption engine that will significantly benefit local economies and currencies that export into the mainland, like the ringgit.
The Australian dollar is still underperforming following dovish comments from RBA Assistant Governor Christopher Kent said the central bank still had room to compress short-term interest rates. It would not be unexpected if the Bank Bill Swap Rate (BBSW) were to pop below zero. But the Aussie is trading off overnight lows, propped by improving risk sentiment and the yuan's gravitational pull. But rule number one in FX trading is to never to fade an unexpected central bank pivot, so I would expect bigger upticks to be still faded.
Yuan and a regime shift?
The market’s favored weaker US dollar expression is USDCNH lower, especially if one believes there’s a regime shift afoot. Still, beyond China's macro fundamentals and possible regime shift, USDCNH downside remains the path of least resistance in the two most likely US election outcomes (judging by prediction markets and the polls): a Democratic sweep, or a Biden presidency with a split Congress.
The macro dynamics in China are rapidly changing, where supply chain dominance is giving way to internal consumption. It’s unlikely that China will continue to pump excess reserves into US bonds, supporting US consumption of Chinese exports; those days could be over. And since China has shown little appetite to pump up the market using over-inflated credit mechanisms, it’s down to the strong yuan to act as a magnet for attracting bond flows to pay for new internal and external initiatives like the BnR. And we may be entering a period in time where the yuan will start to receive some of the US dollar’s exorbitant privileges. The RMB's gravitational pull has gone well beyond Asia FX and is becoming progressively influential and a significant bellwether for G10 currencies.
Gold prices weakened, but only modestly, in Asian and European trading, bottoming out below USD1,900/oz but recovering in US hours as gold investors were encouraged by the tenor of the stimulus talks, which remains the primary – and perhaps only – catalyst in gold over the short term. Details of further US fiscal stimulus seem to be the primary driver of price action, and that should remain the case into the US election. Equities and broader risk sentiment seem to be the secondary drivers at the moment.
But the view gets very clouded from here as the Fed's average inflation targeting framework is seen as containing an element of bluff in terms of good symmetry. There’s a lack of clarity about how long and how far inflation above 2% will be tolerated, creating credibility problems and continuing to weigh on gold’s longer-term bullish ambitions.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll