The Week Ahead
Though this week's economic calendar features several notable releases – such as the October CPI (Thursday) and PPI (Friday) – all eyes remain trained on the US election, the outcomes of which retains a degree of uncertainty. Also inconclusive is what happens with regards to legal challenges.
For Trump, It’s Business As Usual
Politico reports that President Trump is going to make the most of his position through to inauguration. While the legal battles will go on, he plans to fire several key aides, like FBI Director Wray and Defense Secretary Esper. Politico also said Trump is planning to resume travel and that he wants to sign a raft of executive orders on trade and manufacturing.
Georgia Run-Offs May Determine Senate Control
Control of the US Senate likely comes down to run-off elections for Georgia's two seats, held on January 5. Republicans are favored to win both run-offs, but given there will be a tremendous amount of attention on these two contests, there may be some uncertainty/surprise. If Democrats prevailed in both run-offs, the Senate would likely be split 50-50, with the next vice president able to cast tie-breaking votes.
The Week That Was
Stimulus coming to an asset near you
Before election day, the street thought gridlock would deliver the least fiscal stimulus and be the most negative for near-term growth prospects. Since election day, Senate Majority Leader McConnell has sounded a tad more open to a stimulus deal. This shift in tone increases the chances for a holdover package and could hint at the potential for a somewhat larger stimulus deal than the street has initially vectored. Indeed, this makes sense as some of the Republican fiscal hawks have been re-elected. Now the Senate focus turns to Georgia.
US Non-Farm Payrolls Beat Expectations
US October non-farm payrolls came in at 638k, better than expectations for 580k, and after the upwardly-revised 672k in the prior month. The participation rate came in at 61.7%, also better than expectations, for 61.5%, and after 61.4%.
It’s tough to poke too many holes in that set of US jobs data. An increase in the participation rate and a reduction in permanent job losers indicate little sign of permanent damage to the labor market. The average weekly hour's increase is good, too – at 34.8 hours per week, it’s the highest level since records began in 2006 and bodes well for near-term hiring trends and lessens the degree that a long tail of a slump reopening and related hiring numbers could mean for upside risk.
US Equities End Busy Week With More Dispersion
US equities are finishing the week with much more dispersion, but some of that is due to a massive wave of earnings on Thursday while helping declutter the runway of lift-off the VIX curve reset lower. Though it is still high and inverted (front end skew), which makes sense given the abundance of uncertainty as the market refocuses on Covid-19 with investors trying to weigh the potential for a slowdown in Q4 via new lockdown measures against potentially positive news on the vaccine front.
USD downside positions across the board dominated flow last week, as investors await clarity on the election result. After a relatively short-lived squeeze of USD shorts, there’s a clear bias to sell USD once again into the end of the week – and on very healthy volumes.
Oil was in the red all day Friday. It seesawed a few times but couldn’t break above the previous day's settlement price, which is never a great way to close out the week. WTI closed down 4.25%, with Brent down 3.65% to close the week up 3.77% and 5.29%, respectively.
Royal Dutch Shell will begin shutting its Convent refinery in Louisiana from mid-November while seeking a buyer, Bloomberg reports. With a slump in demand, Shell is in the process of reducing its portfolio of refineries to concentrate on integrated oil and chemical refineries aimed at the transition to low carbon.
US oil rig count was up by five to 226 for the seventh straight weekly increase. (Baker Hughes)
The world's largest independent provider of oil and products storage facilities said they are practically sold out in the main hubs. Vopak's total occupancy rate was 90% in the third quarter.
With both gasoline and diesel up on the day, the cracks have moved higher. The Dec20 gasoline crack has traded up to $8.34 per barrel and the ULSD crack to $10.77. Refiners need a margin of at least $10 a barrel to turn a profit.
The contango has widened again by about $0.03 at the front of the curve, while the Dec20/Dec21 WTI spread is trading -$3.28 after settling at -$2.95.
We can't brush aside one primary disruptive concern emanating from political polarization which all but guarantees an extended period of instability, whether from protests in the streets – which are almost sure to come – or 50% of Americans shunning red or blue business interest along political lines, which could be a proximal worry for individual stocks and business interest.
But what is an absolute disgrace, even from my apolitical perspective, is when good (bad) news is reported higher (lower) if the firm is politically aligned with the news source. While this will not affect institutional traders to any significant degree, it will impact retail investors' decision-making, leaving them confused and prone to error. This problem could worsen as news sources veer to even greater political extremism.
And with the pollsters being accused of swaying the popular vote, investors will now ignore the polls. The huge problem is that the market will struggle to correctly price political risk when political risk is becoming more critical to market needs. The whole notion that pollsters’ cheerily pick questions for political means or people do not tell them the truth is likely to create more investor problems in the years ahead
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With markets relatively quiet ahead of the FOMC meeting, eyes turn towards exotics; Global equity markets continue consolidating; Oil prices extend gains