All Eyes On Arizona & Nevada
Several major US networks have called Michigan for Biden, so all eyes are now on Arizona and Nevada which represent the easiest path to the 270+ Electoral College votes for Biden to become president. Comebacks for Trump in those states could block Biden and shift attention to Pennsylvania's legal fight.
The Morning After
US equities were stronger Wednesday, S&P up 2¼% heading into the close, underpinned by tech stocks, with the NASDAQ up a little under 4%. US10Y yields slipped 13bps to 0.77% as the likelihood of a 'blue sweep' looks to have materially diminished – and with it a sizeable fiscal stimulus package. Still, oil markets are reveling in a divided government: oil is up 3.9%, gold little changed.
As things stand at the time of writing, the US election appears headed towards a Biden victory with razor-thin margins in several battleground states, an increased probability of a contested election, and Republicans retaining control of the Senate.
But an exact resolution on any of this remains on the horizon. The counting progressed Wednesday, Democratic candidate Biden took leads in Wisconsin, Michigan and Nevada. Wins in those states would deliver Biden 270 electoral college votes and the Presidency. But margins are a hairline in Nevada: a 0.6% margin with 75% of expected ballots counted.
President Trump's campaign has indicated it has filed a lawsuit in Michigan's Court of Claims, seeking to halt counting and stating it "has not been provided with meaningful access to numerous counting locations to observe the opening of ballots and the counting process."
Regardless of that, will anything derail the equity rally? It’s much more comfortable to rationalize tech higher as investors turn sweet on the idea of a divided government. With no blue wave tsunami, perhaps massive regulation and higher taxes are now off the stock market’s bearish hit list?
The base case in the market is now a Biden win/Republican Senate. The reflation trade looks done, for now. There has been a massive move lower in the VIX, which helped propel stocks; this was not wholly unexpected as hedges rolled off but should not be confused with new entrants now shorting the VIX.
It will be interesting to see what happens once the dust settles a bit, but I’m having a tough time imagining this market running higher if the election ends up in the courts.
Accelerating Covid-19 cases and new shutdowns are obviously not good, but I think the market will quickly look past these new measures. Rolling shutdowns are part of the pandemic’s new normal and most traders understand this will be a global feature until we get a vaccine or herd immunity. While some assets like oil will be hit hard, other assets remain relatively buoyant, floated by a mix of central bank and fiscal policy.
Still, keep an eye on any vaccine headlines over the next few days, which could again shift the underlying themes.
Vaccine rollout is near for some large economies. The UK and Germany could be vaccinated this year, and the market usually embraces themes once they’re around 6-8 weeks away. As vaccine rollout confidence rises, Covid case data becomes less critical and feels synchronous rather than driving the narrative.
The vaccine front is now very much 'live.' If preliminary results suggest 70% or higher efficacy, a vaccine will come close to being a genuinely game-changing panacea.
The yuan rallied on the first election passage, even if it’s not a Democratic Sweep. Yuan traders are walking the talk, suggesting China's economy cares less about the prospects of fiscal stimulus, but rather the yuan is reveling; indeed, USD-China geopolitical fears should ease if Trump vacates the Whitehouse. Still, it’s time for PBoC yuan watchers to see any pushback and FX traders to refocus on possible US dollar save haven flows if the election is legally challenged.
Selling the dollar is nowhere near as clear cut as it would have been under a blue wave regime. Whoever wins the White House, the odds of a structural shift towards easier fiscal policy in the US have dramatically declined with Republicans controlling the Senate. Wider twin deficits and the Blue Wave reflationary trade were the essential drivers behind the market's negative dollar view, put on hold. Now the dollar only needs to struggle against a beach break.
The Ringgit is trading more favorably on two fronts; higher prices come as a surprising and much welcome relief, and we should also see the MYR bounce a bit with US-China geopolitical fears easing if Trump vacates the Whitehouse.
Gold is stuck in no man's land, hugging either side of the $1,900 level. While central bank policy remains supportive of gold, absent wider twin deficits and the reflationary stimulus trade, the essential drivers behind gold are moving higher have evaporated. And the beta of the S&P 500 to gold is now positive (having been negative three months back) because of a positioning build-up. Indeed, this means gold is no longer useful as a risk hedge.
Oil prices like a lot this morning: the idea of a divided US government, France’s stimulus impulse, DOE beats and OPEC+ extension
Crude prices continued their recovery. The bounce began with an increased likelihood of an extension of the current OPEC+ quotas into 1Q. Further OPEC producers continued to suggest that this was firming up.
The market reacted well to Tuesday's API numbers and the DOE confirmation overnight. The surprise "inventory draws" came at an appropriate juncture for the crude market, which continues to struggle under the Covid cudgel; WTI is trying to claim +WTI 39 while the overnight higher watermark Brent sits comfortably in $40-45 range.
The French cabinet unveiled a new draft budget bill for 2020, amending this year's budget for the fourth time, easing economic concerns at the epicenter for the EU lockdown beatdown and supporting road fuel demand.
It will be submitted to Parliament's vote in the coming days; this draft aims to shelter the economy from the impact of the second nationwide lockdown in place since October 30th and until December 1st, at least. The fiscal package included EUR20bn of additional public spending.
On the election front, crude oil liked the divided US government; the critical variable in a Democratic sweep would have been an improved relationship between the US and Iran, which is now likely off the table. So is a possible re-engagement on the nuclear deal, and the prospect of a potential ~1.5mb/d rebound in Iranian production, which would be a massive problem for oil markets, So, fortunately for oil markets, it would seem any olive branch to Iran will not be extended anytime soon.
Oil by the numbers: distillate draw received favorably by the market
The agency reported a draw of 8.01mn barrels, while analysts had been expecting a build of 890k barrels. It was similar to gasoline, where estimates were for a "draw" of 871k barrels while the API reported at 2.45mn barrels build. Distillates were seen down by 577k barrels and Cushing up by 981k barrels.
Meanwhile, the DOE confirmed a massive draw in oil inventories and reported a build in gasoline stocks instead of a" draw." The "draw" in distillate stocks, although smaller than expected, was received very positively by the market.
Despite the build in gasoline stocks, futures rallied, seeing the crack tighten. The recovery in gasoline is going into reverse as total national socks are up 1.5mn barrels to 227.7mn barrels with builds in every PADD except the West Coast. Imports to PADD1 are their highest in four weeks. The East Coast imported the equivalent of two full cargoes a day last week. Stockpiles in distillates have declined over the previous four weeks and saw diesel futures rally almost 4%. Oil Stocks at Cushing Oklahoma rose to the highest since May.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll