Asia Market: With no stimulus backstop, traders have cause for caution

Market Analysis / 9 Min Read
Stephen Innes / 19 Oct 2020

Market highlights 

  • Investors sit in wait for a pre-election US stimulus package: 48 hours and counting…
  • Oil market tug of war plays out between Covid-19 and demand, buttressed by the omnipresent OPEC backstop
  • Currency markets remain flat, but the gravitational pull of USDCNH is expected to influence G-10 and Asia FX
  • Gold gets a downward push thanks to good retail sales data


Markets
 
US equities ended flat Friday with the S&P unchanged after spending most of the day in positive territory amid better US data – most notably resilient retail sales in September – before falling in the last hour or so of trading. Europe's stocks were more robust, and US10Y yields lifted 1bp to 0.75%.
 
Stock futures are pointing higher this morning on expectations that China's GDP will rebound further amid continued normalization of economic activity, with increases in domestic demand decisively above their pre-Covid-19 levels.
 
All the while, investors sit in wait for a pre-election stimulus package that’s going to be very necessary, as viewed through the lens of rising US initial jobless claims which will only become more painful towards year-end as state-level unemployment stop-gaps fall under pressure. Indeed, a near-term deal could go a long way to relieving much of the market’s post-election anxiety, which could still result in a contested affair and drag out into the mid-December electoral college vote.

 

On again? 48 hours and counting…

Nancy Pelosi said a stimulus package must be agreed in the next 48 hours if it is to pass before the election, as the Democratic speaker of the House of Representatives turned up the heat on senior Republicans over coronavirus aid. She told ABC News on Sunday: "We don't have agreement on the language yet, but I'm hopeful."

Let’s hope that for the millions of Americans struggling to put food on the table and in fear of getting the proverbial lump of coal in their holiday stockings, where there’s a will, there’s a way.
 
Of course, failing a stimulus package, investors could approach the next few weeks with caution – markets were overly consensus around a Democratic sweep and all that entails larger stimuli. Still, it may be difficult for risk to trend too far in either direction without an actual outcome at this point.

Equities initially recovered on Friday on a bit of an Alka Seltzer (relief) rally after Thursday's rough treatment. Still, generally, the lower turnover and the S&P 500 slide into the close suggests investors simply cannot let go of the Covid vaccine step-back amid a combination of rising cases globally.
 
The US elections of late may have overshadowed the Brexit theme, but since it could be President Trump's last kick of the can and the final chance to turn the tables as the last presidential debate ahead of the US election is on Thursday, the President will be loaded down with Hunter's e-mail implicating the Democratic nominee Joe Biden in a kickback scandal. It should be another bar brawl debate night for the ages, so look for investors to pivot back to US election risk this week.

 

Oil Markets
 
The tug of war between Covid and demand continues to play out in oil markets, buttressed by the omnipresent OPEC backstop.
 
Near-term headwinds remain, but OPEC's efforts to tighten the market seem to be working. OPEC+ will meet at the end of November to discuss, among other things, whether to proceed with the planned easing of production cuts from January 2021. Iraq, one of the main laggards in the early stages of the new OPEC+ agreement, said it had achieved 100% compliance with its OPEC quota in September, including an additional ~200kb/d of cuts to compensate for initial overproduction. 
 
Any recovery in risk markets on stimulus talks will also find an echo in oil markets. And beneath the choppy surface, China's data for September so far is indicative of an economy firmly in a cyclical upswing and supportive for all commodities, including oil.

The coronavirus pandemic will continue to dominate attention as case numbers rise in Europe and the US as governments move to impose mobility restrictions. And with a trajectory for Covid-19 infections skewed firmly upwards at this juncture, it raises serious doubts about the robustness of the anticipated economic recovery and thus the prospects for oil demand growth.

The good news is that the OPEC+ producers appear well attuned to these fluid conditions; OPEC Sec-Gen Barkindo acknowledged that the group would take stock at its November meeting, suggesting the potential for January's planned quota easing to be deferred.
 
By themselves, a resurgence of Covid or the ramping up of oil production in Libya could have been sufficient for OPEC+ leadership to extend the current quotas but the toxic combination makes the scheduled tapering on January 1, 2021 very unlikely. Frankly, adding oil to the market at this juncture, with demand so fragile, is a flat-out bad idea if the group's real intentions are to stabilize and support prices.
 
While the soft and curfew-style mobility restrictions appear to be the first line of defense when it comes to curbing the Covid outbreak in the EU, for global growth concerns let’s hope these measures don’t prove to be the equivalent of the Maginot Line.
 
Still, every cloud has a silver lining as Asia's colossal oil consumers, via Chinese and Indian refineries, are ramping up production. China's economic lift-off, combined with the surging yuan, sees mainland's teapots snapping up barrels of Middle Eastern crude to feed new and expanding plants. Meanwhile, India's oil refiners have the Navratri and Diwali boost to look forward to – and that’s something not even a rapidly spreading virus is expected to derail.

 

Currency Markets 
 
Currency markets are opening flat but expect the gravitational pull of USDCNH to influence both G-10 and Asia FX today.
 
I suspect we’ll see a lot of choppiness ahead of the US electoral vote and more vaccine news. But traders might be more concerned than they’re currently leading on about post-election uncertainty in the US and a good chunk of risk hedgers are still holding US dollars, fearing a flight from risk in the near term. So, under that assumption, the US dollar’s safe-haven appeal could still resonate – even more so with Covid ravaging Europe.
 
The Yuan 
 
After the market's frantic response last week to PBOC's onshore FX reserve changes, which were read as a macroprudential pushback and sent the yuan reeling, I suspect the market will parse today’s fix again after the yuan ended the week unchanged.
 
While most yuan bulls expected the overwrought reading on the PBoC shift to be faded due to China's better growth fundamentals, rate differentials and balance of payment strengths, even this yuan bull was surprised to see USDCNH pushing low 6.69's going into the weekend. Clearly, in the view of the street, last week's speedbump is by no means a bearish gamechanger.
 
The RMB's gravitational pull has gone well beyond Asia FX and is progressively influential for G10 currencies. And the yuan rally balloons possibly floated both the Euro and Australian dollar into the weekend, as with the aggressive shift higher in the EU Covid case curve and the blatantly dovish RBA, the EURUSD could have traded down to the high 1.1600's and the AUDUSD to the mid to low .7000's in the absence of a robust yuan. Indeed, the CNH could become increasingly influential, even rivaling the EURUSD effect on G-10 into 2021.
 
Post-election, regardless if Biden or Trump gets in, both regimes will be China exchange rate hawks and will insist that exchange rates adjust to reflect bilateral trade imbalances. With fundamentals favoring the yuan, and assuming a Biden win, there would be a forceful US treasury response from Leal Brainard or super currency watchdog Elizabeth Warren (depending on who gets appointed).

So, I think the yuan could trade another 5% more potent in 2021 and possibly down to USDCNH 6.35-6.40 level, if for nothing other than maintaining peace on the trade war fronts. And this could levitate the EURUSD to 1.20-1.25 on the yuan’s gravitational pull theory.
 
USDMYR
 
The gravitational pull of the yuan should be felt in the high beta China growth currencies like the ringgit as traders parse China GDP data this morning, which is expected to show a fast pace of economic normalization post-Covid-19. Oil prices remain supported by Asia demand and OPEC compliance, and with the yuan trading stronger on Friday – assuming the PBoC doesn’t toss out another RMB speedbump at the fix – the MYR could trade on a good tangent this morning.
 
GBPUSD
 
The never-ending Brexit carousel continues to spin. GBPUSD is a little lower as PM Johnson failed to commit to additional talks but called on the EU to make concessions so that talks could resume. GBP's relatively mild reaction suggests the market views such rhetoric as brinkmanship and that negotiation will eventually deliver a deal. But the UK's stance does seem to have hardened a touch. 
 
EURUSD 
 
The Euro was very lazy into the weekend with nothing provocative to whet traders' interests beyond the fluctuation of equity sentiment to offer direction.

 

Gold Markets 
 
Gold was pushed down to USD1,900/oz in the US, primarily by good retail sales data, which showed sales rising 1.9% mom, above expectations of 0.8%, according to Reuters. That would seem to suggest gold could be sensitive to a degree regarding more or less monetary accommodation from the Fed, where more robust data will elicit a less dovish response from the Fed.  
 
Near term, direction defaults back to the US dollar and US equity market movement, where gold has found a friend in the yuan, which is holding the US dollar "safe haven" ambitions in check. 
 
Fiscal policy support has been a critical support factor for gold, and if there’s one sure thing, it’s that the stimulus is coming. Whether it's a “Blue Wave” or a capitulating Democratic House cutting whatever deal it can – or even if it's four more years of Trump – the stimulus is going to be very necessary, as viewed through the lens of rising US initial jobless claims which will only become more painful towards year-end as state-level unemployment stop-gaps fall under pressure. Indeed, this should be enough to support gold and silver, and I expect mild gains. One significant risk here is that Blue Wave could lead to a massive fixed income sell-off and an explosion higher in the US yields.
 
Still, a sharp rally at this stage looks unlikely, unless there’s a significant geopolitical event that negatively impacts financial markets as there appears little likelihood of additional monetary stimulus from the present (already high) levels.
 
But I remain positive on the platinum and palladium markets from several factors, including a quicker ESG transformation under a Biden presidency – and the world, for that matter. Simultaneously, China's 2025 ambitions will trigger mainland consumption engines to rev the red line (positive).

For more market insights, follow me on Twitter: @Steveinnes123 

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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