There’s always risk in writing an early and slightly bearish note as we enter turnaround Tuesday after a case of Monday morning Covid headline blues sent the market reeling. Though while I don’t think we will have a Monday replay or pancake Tuesday, price action will likely be choppy due to diminishing pre-US election participation in stocks.
Equity markets are trading just off the overnight session's lows as the setup into next week's US election becomes a convoluted web of confusion. The second and third wave spread of Covid-19 is possibly triggering a point of no return for some industries as the economic damage borders on irreversible and, adding insult to injury, the Covid induced downward spiral continues accelerating.
Risk aversion is high on the to-do list in what’s been a very broad pullback after the market turned better for sale out of the gate in Asia yesterday.
In Europe – and possibly a foreshadowing of more earnings gloom to come in what was thought to be a Covid-impervious market sector – SAP, one of Europe's largest tech companies, issued a profit warning shocker overnight and highlights the risk for further cuts to Q4 numbers for the broader tape, especially in a backdrop of increasing lockdown measures.
As risk-off percolates, no one seemingly wanted to get their hand caught in the buy the dip cookie jar overnight with some big tech earnings ahead amid some very crowded trades. But let’s hope it will be an all you can indulge "Thursday Night Special" with AAPL, AMZN, GOOG and FB all reporting.
Still, it feels like the market is finally taking the global surge in Covid cases a bit more seriously this week. And with the imposition of curfews across Europe, economic dangers now lurk in the dark.
Elsewhere, the tightening presidential race and lack of progress on a fiscal deal (although I suspect the market didn’t attribute too high a probability of any real progress) is also providing investors some angst as the odds of a clean sweep lessened somewhat. For the record, S&P 500 e-minis dipped through 3400 after White House economic adviser Kudlow said to the media that there are several areas in the Pelosi coronavirus plan that Trump cannot accept.
On the constructive side, joyous vaccine noise increases (although one could argue this is well seasoned) and Brexit negations seem to be stumbling along to some face-saving resolution.
Like the back end of last week, Monday has felt more like de-risking than market blowdown. So, we should expect price action to remain choppy in the days ahead, with investors very reluctant to put on any significant risk ahead of what promises to be a headline heavy week or two.
Oil has fallen over 5% from Friday's peak as sentiment was hit by the apparent lack of progress on a US stimulus package and surging coronavirus numbers in the US, Europe and around the globe. News that Libya has lifted force majeure at the El Feel field – the last major field to remain "shut-in" after conflict escalation in January this year – added to supply concerns.
Together with associative waning US gasoline dependencies at the pump, pressures on both the supply and demand are pushing oil ever so closer to a Covid-induced tipping point.
Still, markets have the end-November OPEC+ meeting to lean on. And while there are several variables to consider, I would expect the conclusion to be neutral at worst and likely positive for oil in the medium term. But OPEC compliance is only providing support at margins (deep dips) and far from a bullish catalyst – especially with gnarly second and third wave spreader headlines feeling like a lead weight around the market's neck.
The US Dollar
The USD is a bit firmer this morning amid rising Covid-19 cases, stalled US fiscal stimulus talks and downbeat corporate guidance in Europe. For the most part these are not new factors, but SAP's warning that Covid-19 could continue to hamper operations well into 2021 has made sure a risk-off mood across markets endured overnight with equities and bond yields lower and the USD higher.
The EUR is a notable underperformer again, as Germany's IFO data is now bearing witness to the early impact of the recent Covid-19 surge.
The British Pound
GBP is holding its ground against a stronger USD this morning, despite the broader risk-off tone in markets. The genesis of GBP's resilience remains the unwavering optimism around the prospects for a Brexit deal.
The Chinese Yuan
The new entrant yuan bulls ran for the exits yesterday after reports that China is set to sanction Boeing Defense and Lockheed Martin due to US approval of arms sales to Taiwan. That’s not exactly the news local traders were positioning for with China's policymakers meeting this week to discuss the 2021-25 five-year plan. The persistent sell-off on USDCNH, given the lack of resistance from PBoC compared to 2017, was expected to herald in a new regime to promote flexibility and internationalization of the currency.
I would think the sanctions are a stark reminder from Beijing that regardless of who sits in the White House when it comes to sovereignty, China will not roll over. CNY position is pretty stretched, and we saw predictable results.
The Malaysian Ringgit
The ringgit is still clouded by political uncertainty, which has triggered some small stock outflows. But broader concerns around the prospect of a global economic reset lower on the resurgence of Covid-19 is hurting Asia exporters and even more for the ringgit with oil prices in the tank.
My Currency View
The market wants to load up on currencies but is still dealing with the “fool me twice” syndrome as inaccurate polls from 2016 remain fresh in traders’ minds and are wary of making the same mistake again, and it’s this that has introduced significant bias for the past week.
Traders want to get involved, but they’re holding back for fear of a worst-case socially disruptive outcome and have not fully started to take heart in the improved prospects of a bipartisan stimulus agreement, even as the dollar sits on the brink of the next leg lower.
Gold gets back above USD1,900/oz despite USD gains and an equity slide as there’s sufficient US pre-election 'safe-haven' demand to buoy bullion.
Gold was caught between the bearish impact of a firmer USD and lower bond yields and significantly weaker equities. And while it didn’t rally, it held it its own. This suggests a rise in risk-off appetite, and the consequential stronger US dollar was not enough to drive bullion lower. Indeed, this is encouraging. Gold enjoyed enough safe-haven buying – generated by the rising number of Covid-19 cases and the equity slide – to offset the bearish impact of a higher USD. But these are only short-term type risk vagaries. Gold is still looking for that elusive inflationary spark.
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Investors are still digesting the latest statements from the US central bank, which surprised markets with a far more hawkish stance than expected