Home / Blog / Market Analysis / European Market: A less chaotic debate but no new news, oil shift to the path of least resistance, investors fight the buy now or later mind games before boarding cash boats

European Market: A less chaotic debate but no new news, oil shift to the path of least resistance, investors fight the buy now or later mind games before boarding cash boats

Market Analysis /
Stephen Innes / 23 Oct 2020

The final US presidential debate was less chaotic than the first but has not caused much of a stir as it offered little in the way of new information that could shift the results of the election in the market's view.

Over the past five days, the cross-asset price action paints a clearer picture of what a Democratic sweep scenario means. Equities lower on the prospect of higher corporate taxes, yield curve bear steepening on higher fiscal deficit spending, USD down on the reflationary impulse and less geopolitical risk 

But before boarding the cash boats, investors need to fight off the mind games as they continue to ask themselves if they are too cautious ahead of the US election. Joe Biden's clear lead in the polls has forced them to consider whether they may miss the move if they wait any longer. The market always seems to go to the maximum point of pain before that realization set in. But I am not sure if we have hit the threshold of not, which would be a fair bit above SPX 3500 before the FOMO chase happens.

There is, however, a good reason for caution. Markets are pricing plenty of uncertainty around the outcome after election day, and who knows where the pools will be next week, which could be a massive game-changer for markets

With so much political uncertainty clouding the view, which is being obfuscated by the Covid haze, European equity futures are flat in early trading. In Asia, value outperformed following the US session, which should follow through into today's European session, particularly in better Q3 Banks earnings.

Forex Markets 

The risk of a contested US election edged higher on the disclosure by John Ratcliffe, the US director of national intelligence, of evidence of possible foreign interference in the upcoming US election. The "risk-off" vice of a contested election had dwindled in the last couple of weeks alongside the Democrats continued strong showing in polls. These headlines pushed the risk of a contested outcome back onto the market radar. Indeed, the headline has halted the race for Blue Wave's short dollar positioning. 

The Euro

European equities' somber mood should continue to put a lid on this week's rally in EURUSD. Much of the news flow out of Europe remains familiar and concerning. Germany and Italy recorded another record day of new COVID-19 cases, But just as worrying for the Euro were gnarly economic signals out of European data overnight. The French INSEE survey for October was down 2pts, weaker than expected. In the details, the services index fell 5pts to 89 (the long-term average is 100) and back towards its July level, and most forward-looking indicators worsened: expected turnover fell 9pts, expected employment fell 6pts. The flash estimate for euro area consumer confidence in October was weaker-than-expected, suggesting the rebound observed over the past few months might have come to a halt.

Do not forget the ECB is on tap next week. And with Covid cases and activity restrictions rising, the ECB could start hinting at further policy stimulus in December. We get data out of Europe that could help shape the path forward for the board – advanced PMI today could be a critical tradable event, as will next week's GDP data. 

The British Pound 

GBPUSD drifted off a touch with the US dollar broadly trading a little firmer. There may be a little bit consolidation in the coming sessions as the US election draws near, and as such, the dollar may return to the driver's seat.

The Australian Dollar 

AUDUSD price action has been a little choppy in Asia today. The pair initially caught a bid on the open in equities futures, although supply emerged ahead of the resistance into 0.7145/50. As the US dollar regained some strength, AUDUSD drifted back down through 0.7110.

The Chinese Yuan + Asia FX 

China regulators stepped into the Yuan debate today. SAFE said in a statement earlier that the Yuan is more stable than expected, with a relatively high degree of flexibility. SAFE expects the Yuan to fluctuate around a reasonably balanced level and said that regulators would monitor inbound and outbound capital flows.

USD/Asia vols have come off the highs, with USDCNH 1y 0.15 vol lower from 6.725 to 6.575 vol. As expected, it seems like there is a decent supply in CNH vols at these levels via vol swaps. Front-end vols, however, have been relatively bid in CNH, KRW, and TWD, with US election weights squeezing higher across the board. On this move higher in USD/Asia, we have seen some renewed interest to put on fresh USD/Asia downside in CNH and KRW. 

USD/Asia price action has been sideways today, with USDCNH stuck in a 6.66-67 range and USDKRW 1m NDF trading 1133-36. 

Still, selling outright USDCNH topside remains a decent trade-in my view since the vol to carry skew looks favorable despite the risk of a contested US election back onto the market radar after the disclosure by John Ratcliffe, the US director of national intelligence, of evidence of possible foreign interference in the upcoming US election. 

Oil Markets

In what became a relatively no brainer trade of the week, sell oil as London walks in. It is way too early for the EU oil community to turn positive with stricter lockdown measures being enforced left, right, and center. Asia and US traders had a similar depressing take of the oil markets proceeding when they first fell under the Covid lockdown cosh. The trading skew's psychological impact takes a bit to shake off as vast street elements remain focused on mobility restrictions. But watch for the dip-buying below WTI 40 to be bound as indeed it has been a recent pattern to see early weakness in Europe and then recovery as US markets open.

Why does this trade work? Traders remain unwavering that OPEC will continue to defend the downside for oil prices via a more calibrated monthly market evaluation and inventory management approach.

OPEC hopes to tighten near-term balances push spot prices higher than "forward prices," the elusive backwardation, encouraging inventory draws.

Dip buyers believe until this unambiguously occurs, OPEC will cover the markets back. And positively for OPEC compliance concerns, all the push pump-happy members appear to follow the compensation principles. 

The street is not entirely convinced about the Kremlins jawboning sincerity overnight, and why would they be after the Presidential debate when both protagonists had a go a Putin. Indeed, the street remains concerned the Kremlin's latest "oil put" could be nothing more than an attempt to assuage a market in desperate need of a Covid lifeline and begging OPEC+ not ramp up too quickly, hence the limited price follow-through.

Gold Markets

With the US dollar hogging the "safe-haven" limelight so far, Gold has become a bit of an afterthought, but I do not think it will take much to shift the market into overdrive. 

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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