As of Monday
This week's economic calendar will provide significant glimpses at the US economic recovery pace and zero in on forecasters' estimates for Q3 real GDP growth. While the data docket kicks off on Tuesday with the September CPI release, the main focus should be Friday's retail sales and industrial production reports.
We’ll get another dose of Fedspeak, the highlight being Vice Chair Clarida's (dove) speech on the US economic outlook at the IIF annual meeting on Wednesday and Atlanta Fed President Bostic (non-voter/dove) discussing "benefits cliffs" on Thursday. The Fed officials' chorus is still imploring Congress to deliver an immediate fiscal stimulus boost to the economy. While the calls are starting to sound a bit like a broken record, stocks continue to surge as investors give US lawmakers the benefit of the doubt while recognizing that regardless of who wins the election, the first order of business will be the passage of a hefty fiscal package.
We had a decent move in crude prices last week as exogenous factors – such as an offshore workers strike in Norway and Hurricane Delta both shutting in production – are providing support, albeit both are temporary effects; the rally can trip up pretty quickly if the strike is resolved or the Delta storm surge effect is less disruptive than thought and production returns fast. Typically, unexpected supply-driven bounces are a fader’s delight. Still, energy traders are holding on to the stimulus lottery ticket and stay on the look-out for any moves forward in extending stimulus packages in the US, which would provide a high degree of comfort on the demand side.
Meanwhile, newswires reported that OPEC+ was contemplating the need to extend the current quotas into early 2021 rather than follow the scheduled ramp down of curtailments – this would help normalize global inventories. I think the timing of OPEC verbal intervention was not so much of a surprise given the resurgence of Covid around the world, but it was a welcoming backstop none the less.
OPEC's long-term outlook for oil, published last week, lays out a view of oil demand not peaking until ~2040 with a decent recovery in the next 2-3 years post-Covid and, at the least, ought to be food for thought in the context of the conventional wisdom of oil markets now slowing and declining
OPEC publishes its 2020 World Oil Outlook to 2045
In OPEC's base case scenario, crude demand would grow from 90.7mbd in 2020 to 109.3mbd in 2040 (oil peak). The global demand decreased this year to 90.7mbd (-9mbd y/y), seeing increases each year to 2025 at 103.7mbd. Oil demand growth will be driven by countries that are not part of the OECD, natural gas will be the fastest-growing fossil fuel between 2019 and 2045, and coal is expected to decline in demand. US crude oil production is forecast to rise to 13.4mbd in 2025. Once the cuts are over, the cartel's output will increase by more than 10mbd between 2021 and 2045 (OPEC).
The bullion complex jumped, with gains across the board in all the precious metals. The USD came under pressure in Asia, which only accelerated in European and US actions. Gold got a shot in the arm from China's return from its extended holiday with a lower-than-expected USD-CNY fixing Friday.
Gold and US interest rates have had a clear negative relationship over recent years. This can be seen in the broad moves over the last two years, with gold +58% while the USD 30y swap rate has dropped >2pts, and the granular daily or weekly return realized correlations have been negative for most of the last seven years.
Long-dated interest rates continue to trade close to record lows, while gold may be poised for another leg higher (with a potential catalyst in the event of a Democrat sweep in the US election). Investors are anticipating that the next move could see both gold and rates moving higher together – which is mapping back again to the 2008-09 stimulus.
In Asia on Friday gold demand came flying out of the gates, with the more prominent players taking notice of the jet fuelled Yuan rally, which was always going to feed through the G-10. But when the EURUSD started to pick up steam as London walked in, it was + $1900 "rally time" for gold.
Also, vaccine approval and a Democrat sweep at the US election can push US breakevens higher. Vaccine potential remains only 55-60% priced in, according to UBS strategy; despite rising cases and mobility restrictions, risk markets remain resilient – the dips in gold might provide good buying opportunities again.
Fixed income turned less of a barrier for Gold on Friday
For all the talk of a "blue wave" the steepening trade has stalled, and I’m left feeling that moves this week were simply supply-driven and gold supportive.
It’s hard to reconcile that with the narrative we’ve been fed all week. Perhaps investors are best off focusing on the equity market for election narratives rather than fixed income? Alternatively, it’s still far too early to start trying to price in a post-election stimulus, given some of the uncertainties that lie ahead.
Renewed hopes for US fiscal stimulus alongside a stronger post-holiday RMB have put the USD on the backfoot.
Risk sentiment is generally favorable with equities higher and the USD losing ground. Markets appear to be siding with an optimistic view on US fiscal policy and the increased probability that Biden wins the US election. There’s been a clear theme of the market reducing election vol weight ever since the first debate, driven by the expectation for a decisive Biden win (so less volatility on the night itself and after that without a contested result). Hopes of a Brexit deal are bolstering GBP topside. With the US curve bear steeping stalling out, traders were more inclined to take profits rather than add topside USDJPY, especially with USDCNH shifting toward 6.67.
FX traders took a lively read for cyclical-heavy Europe, and thought of a Democratic sweep could well be the catalyst for some real rotation into Europe. Both macro and longer-term strategic funds have been buying the EURUSD in earnest the last few weeks to redeploy in a European equity cyclical binge. But the top side attempts have been running into a lot of supply from interbank types due to the resurgence of Covid in EU and a more dovish spin on the ECB. That supply appeared to give way on Friday, likely due to a Biden widening in the polls.
The Pound's impunity to the weak economic data likely reflects continued hopes for progress in Brexit talks. Negotiations continue, with some reports that the EU may soften its demands regarding access to UK fishing waters.
China returned from its extended holiday with a lower-than-expected USD-CNY fix, and USD-CNH has nudged below 6.70 in response. Even though the RMB has strengthened notably on a NEER basis since the beginning of August, it’s probably not overvalued yet (I'm working on the proof, so more on this in the coming week).
But I think the USD's weakness against some Asian FX and the Yuan’s relative stability against the EUR recently should alleviate concerns about the CFETS RMB index becoming stretched, suggesting the PBoC will leave the door open to further market correlated Yuan driven gains.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll