Will the chop-fest continue over the coming week? Yes, it probably will. Still, US stocks ended a volatile week with modest gains as investors took solace in robust consumer data while sitting patiently for additional stimulus from Washington.
This week's economic calendar kicks off with appearances by Fed Chair Powell and Vice Chair Clarida on Monday, but neither is expected to break new ground. But, hopefully, it will give them a chance to get on the same page.
The Fed’s messaging has been unusually confused of late. While all Fed members are on board with average inflation targeting and enhanced guidance towards the labor market and inflation, there are divergent opinions on the extent of an inflation overshoot and the outlook's strength.
In particular, one problem is that the trio of Powell, Clarida and Williams – who effectively provide joint leadership at the Fed – aren’t on the same page. The general impression is that the Fed is still in a charitable mood, but it’s clear the FOMC thinks support should be fiscal rather than monetary. The Fed's policies are now more suited to ensuring orderly markets and monetary transmission, i.e. there is enough monetary accommodation – the threat is that transmission gets squeezed.
The US equity markets continue to ignore Covid headlines – and even spikes in new cases – as long as no significant mobility restrictions are being put in place; as seen in price action in Europe last Thursday, mobility matters to stock market sentiment.
Even when they do sell-off, the wall of money which has been evident since March kicks in. Investors might be turning their clocks back to the summertime playbooks indulging in the stay at home versus reopening baskets. And while momentum seems tired, folks are sticking with what’s worked.
There was a lot of focus around the 3,500 strikes in the SPX for the expiry on Friday. It was a magnet. The rally in tech stocks last Monday and over the past two weeks has brought attention back to options flows in large-cap stocks and the short-gamma trade. But the most massive tech option volumes are dominated by short-dated, at-the-money calls, and given those volumes are coming from many small prints (according to my colleague at a large NY bank derivative desk), retail seems to be the likely buyer. Is retail moving away from single-stock cash trades to derivatives?
Just in case you weren’t planning to be at your desk on November 3, that’s the day China will release the draft of its 14th Five Year Plan. This is a critical indicator for the yuan and crucial to all sorts of commodity strategies, so start backing up the truck on your commodity linkers and currencies exposed to China consumption.
After the PBoC removed the RRR for financial institutions to short forwards, some traders took a miss-read - or maybe not as we’ll find out Monday at the PBoC reference rate fix. The RMB complex started to pick up steam again after China's total social financing beat expectation, sending the USDCNH back on the max downside trend. China's money supply and credit growth surprised on the upside again in September, which in my view reflects robust credit demand from both the government and private sector on the back of the ongoing economic recovery.
Still, a ton of yuan push back fears eased when Sun Guofeng, head of the PBoC's monetary policy department, said recent yuan appreciation reflects China's excellent growth environment; it seems the PBoC is happy to take one step back to achieve two steps forward. And perhaps this week's PBoC pushback was nothing more than a not-so-subtle reminder that they still controlled the deck when it comes to who deals the yuan cards. Nevertheless, we know the markets will be the eventual dealer those cards at some point – we just don't know when.
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. The GBP's relatively mild reaction suggests the market views this kind of rhetoric as brinkmanship and that negotiation will eventually deliver a deal. But the UK's stance does seem to have hardened a touch.
The Euro was very lazy into the weekend with nothing provocative to whet traders' interest beyond the fluctuation of equity sentiment to offer direction.
It seems that those who needed to cut did so, while the majority are still holding on to the weaker USD dollar post-election bias. I don’t see 200 pips in either direction, so until something gives on the lockdown landscape, I prefer to express Euro negative sentiment via safe-haven CHF.
Over the past few weeks there was much interest in buying AUDUSD on the China commodity impulse as the mainland’s consumption engines were firing on all cylinders. Then the unexpected RBA dovish pivot on Wednesday erased any bullish thoughts and maybe until we clear the November’s RBA decision.
It’s easy to forget that gold has already rallied by more than 25% this year and higher prices are killing physical demand, which helps partially explain why it’s getting harder to make huge profits on gold these days.
Gold looked very shaky last week when European equities started underperforming. And the US dollar gathered steam as the market quickly priced in the second wave of Covid lockdowns, which would sap global growth. I think significant signals will get generated by the S&P 500 e-minis. Fortunately for gold, US equity markets continue to ignore Covid headlines – and even spikes in new cases – as long as no significant mobility restrictions are being put in place.
Stimulus uncertainty was so last month. If there is such a thing as a sure thing, we can be confident 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 for 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.
The problem is not when the stimulus happens – as that has never stopped gold before – but rather it’s uncertainly over the knock-on yield curve effect that could be holding gold investors back. I suspect that could be one of the reasons strategic gold buyers are sitting tight.
The end of the US election race and the consequential fiscal and monetary policy environment could well be pivotal in determining gold's trajectory. As viewed through the US yield curve performance lens, the election may form a dividing line between the current phase of bull steepening in real yields and the next phase. Investor expectations have been fusing around a Democratic win in both presidency and the Senate. This would be consistent with a steepening of the yield curve as a more massive stimulus bill's passing raises inflation expectations and the term premium in concert.
For gold to fly in this environment, rising inflation expectations need to dampen the real yield on short-dated treasuries substantially. At the same time, hopefully, the FOMC has made more explicit their intentions for average inflation targeting by that time.
In a week dominated by virus headlines, global oil benchmark prices remained firmly anchored – even as Covid-19 cases climbed again in the US and Europe ahead of what could be a winter of discontent. Further clouding the outlook, vaccine stumbles weighed on prices after Eli Lilly & Co. halted its antibody treatment tests a day after Johnson & Johnson paused its vaccine trial.
On the positive side, China was the backbone buyer of oil, while indulging in the stronger yuan entering a new bull market against the US dollar. Oil is moving sideways, supported by good compliance from OPEC+, helping to mitigate the negative impact of growing concerns about the global economy's health amid signs of coronavirus case numbers spiking in several regions.
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.
Russian President Putin and Saudi Crown Prince Mohammed Bin Salman held a call earlier last week and urged OPEC+ participants to stay the course; OPEC brethren usually think twice about getting on the wrong side of that duo.
Chinese oil imports were strong in September, up 5.5% month-on-month and 17.5% year-on-year, though it’s unclear to what extent this was driven by improvement in the underlying economy vs. SPR additions. Regardless, refiners snapped up barrels of Middle Eastern crude to feed new and expanding plants.
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Today’s key charts focus on oil, where the recent rally has stalled amidst talk of a lift in sanctions and speculation of a production boost.