With President Trump testing positive for Covid-19, and in the wake of last week's Presidential debate, befuddlement politics will remain in focus over the week ahead as investors follow developments on those fronts.
The US election will remain in the spotlight, with just a month remaining until Election Day on November 3, but the campaign was fully upended with the news that President Trump tested positive for Covid-19 and is now in quarantine.
The main scheduled event will be the Vice Presidential debate on Wednesday at 21:00 ET in Salt Lake City. That will be between incumbent Vice President Mike Pence and California Senator Kamala Harris, with the discussion divided into nine segments of roughly 10 minutes each.
I think data is less relevant in this powerfully charged political environment, but "Fed speak" and other central bank musings will still dictate the pace of play in FX land.
There will be several events to watch out for next week on the central bank front. Chair Powell will be giving a speech on Tuesday on the economic outlook at the National Association for Business Economics annual meeting from the Federal Reserve. The following day the minutes of the FOMC's September meeting will be released.
Meanwhile, from the ECB, President Lagarde will be speaking on Tuesday and Wednesday, with the latest monetary policy account released on Thursday. Finally, the only G20 decision next week is from the Reserve Bank of Australia on Tuesday. Our Australia economist expects no change in policy, but we’ll be watching for clues about whether a rate cut might yet be delivered by the end of the year.
Risk should remain for sale as the market is searching for the new narrative. Still, the post-Trump headlines sell-off slowed into the weekend as stimulus hopes remain alive and comforted by favorable Brexit headlines, as the market digest the implications of President Trump's positive Covid-19 test.
More broadly, the market is beginning to acclimatize to Joe Biden's presidency and the implications for higher taxes and an anti-oil backdrop. The street is seasoning to the idea that oil will be the risk barometer for a Biden win (similar to the Mexican Peso in 2016 for a Trump presidency).
Looking further into 2021 – if you can manage to keep your powder dry – a Biden presidency may ultimately prove bullish, especially for the cyclical end of the market, given his pro-fiscal stance. However, keeping one's risk on a tight leash should be the number one priority over the near-term.
One would expect oil to gain, given Biden's thoughts on drilling rights, lower production and so on. On a counter-intuitive spin: oil is the evil for ESG/left politics/big business. That’s a bad situation all around as it brings forward the ESG initiative in a big way, which we know will be bad for oil in the long term.
And due to Biden's oil drilling restriction policy, the big fear here is that drillers – knowing they’ll soon be under Biden's green thumb – will pump hard between now and election day, fill tanks to the brim, and send the market back into a steep contango and 100% a function of storage costs. This, in part, is what we saw earlier in the year.
If you are long WTI oil contracts, should you be worried? Maybe. But there could be much easier trades to be had.
Scenarios around US elections
Some opinions are starting to emerge around possible scenarios after President Trump confirmed he had contracted Covid-19. Here are some views from Charles Myers, the head of Signum Global Advisors:
A stimulus deal becomes more likely in the short term. House Speaker Nancy Pelosi will not want to be seen as holding up virus-related spending. She will lower her spending demand.
If it’s a quick and mild case, he’ll likely get a positive bump in the polls. However, a sympathy bump is very unlikely given his prior attitude on Covid-19 and the US death rate.
Former VP Joe Biden was tested on Thursday and the result was negative. He may well suspend campaigning for a while and instead point towards his likely cabinet.
In the extreme scenario that Trump is incapacitated, VP Mike Pence would become president and would also likely take over the presidential ticket. The two most likely names to join him as vice president would be former UN ambassador Nikki Haley or Secretary of State Mike Pompeo.
Look for another challenging week in the crude market after Friday kicked off 4Q with a splat as the battered energy complex was roiled. An impasse in getting a US stimulus bill through, 914 data confirming the jump in US liquids production into July, Reuters data showing exports picking up from non-OPEC+ participants Iran, Libya and Venezuela, and the continued rise in Covid cases all contributed but did not look to be fully explanatory.
The markets still favor gold from the long side. There was a bit of whipsawing around the Trump/Covid-19 headlines, but the general trend still looks constructive. Most gold specialists still believe it’s attractive to accumulate on dips, targeting 1960-1970 over the next few weeks, should equities hold a bid ahead of potential US election headline volatility. But much of gold’s fortune will be dictated by the US dollar direction, acting as a bit of a haven.
Look for another week dominated by choppy price action, with month-end in the way, the first US presidential debate, Brexit negotiations, and non-farm payrolls – and the one-month date has now rolled over to cover the November 3 US election date. Flows in USD have been relatively balanced instead of the apparent bias highlighted last week to buy USD that was probably linked to macro investors' short-term positioning adjustment.
Riding the GBP rollercoaster is still offering the biggest bang for the buck. Sterling started (another) week of Brexit negotiations on the front foot with headlines around the UK and the EU potentially entering so-called "tunnel negotiations" ahead of the October 15/16 EU Summit. This boosted optimism.
The USDJPY curve had the sharpest reaction amongst G10 to the news that Donald Trump had tested positive to the coronavirus. G10 vols (except GBP) had been trading with an offered tone all week, but November election day uncertainly around a contested election has elevated again into week’s end.
Meanwhile, Golden Week should keep things quiet in Asia FX.
Asia FX (Axi Contributes to the Reuters Poll)
This week's Reuters positioning survey shows the reduction in USD short positioning continuing as the US election approaches and the market takes a bit of a break from the risk-on tone at the beginning of September.
USDCNH shorts have been reduced. Only USDKRW and USDTWD positioning remained relatively unchanged from two weeks ago. USDIDR and USDTHB were notable places where investors suggested they are comfortable to be long USD. For Indonesia, our traders maintain a long USDIDR bias as the bearish narrative is likely to continue with foreign investors exiting the equity market, BI independence questions looming, and corporate bankruptcies on the rise. In Thailand, the tourism-reliant economy (with no clear end in sight to Covid-19 restrictions) and political protests remain a drag on sentiment.
The Reuters survey focuses on what analysts believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit, and the Thai baht.
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US stimulus stalemate weighs on all markets; Oil perilously perched on the Covid curve; Traders sell the earnings news. Without stimulus, gold gets no bounce.