FX, Commodities and Stocks
US stocks fell again Wednesday, giving up earlier gains, as investors scrubbed earnings reports and fretted over the latest squabbling by lawmakers on the US stimulus package.
The S&P was down 0.7%. US Treasury Secretary Mnuchin noted that despite some progress with Democrats on further fiscal support, the two sides remain “far apart.” A mixed bag on earnings for banks failed to prevent overall losses in financial stocks. US10Y yields were unchanged at 0.72%.
Higher VIX and higher US S&P Eminis are usually a toxic cocktail for stocks.
Still, election day volatility hasn’t eased – unless you squint hard. And despite reports of widening election polls, there‘s no strong evidence that markets are now pricing a faster election resolution.
There is a remarkable tendency for fear to build and vol to rise about four to six weeks before events – even those that have been on the calendar for years. We saw this with the Scottish referendum, Brexit, and the 2016 election, for example. So it might be wise not to write off any shift lower as your usual temperamental market proclivities or risk-off vagaries.
Markets still have that sinking feeling thanks to a combination of stalled vaccine trials (both Eli Lilly and J&J have paused their phase three trials), slowing macro, and the extent to which governments may have to renew social mobility restrictions to control the spread of the coronavirus continuing to chill investor sentiment.
And, more broadly, the market seems to have got a little ahead of itself in pricing in a pro-fiscal political landscape post-November 3rd. It’s all too telling that vol continues to remain bid despite the run-up in some market pockets in the last number of weeks. On the back of this, safe havens (mirroring equities) like the dollar and treasuries remain bid.
Asian markets could suffer the hangover effect from the US market this morning.
Mainland China was a touch lower, on flattish volume, with people pointing to Apple chain disappointment, but there was extraordinarily little to surprise most traders. A more apropos risk to markets is that, with all that liquidity slopping around courtesy of central banks, have we created a bunch of corporate zombies? That’s pretty apt given we’re on the cusp of Halloween, which always offers up a trick or treat to the markets.
Fed’s Clarida still sounds optimistic
Fed vice-chair Clarida’s comments illustrate why the Fed seems to have hit some communications confusion.
He says GDP will not return to its pre-pandemic peak for another year, which seems quick with the market pricing in no rate hikes to 2025; recent data has been surprisingly strong, and there has been a broad rebound across all types of consumer goods and housing. Fed chair Jerome Powell has seemingly looked to Clarida and Williams for views and backing in the past. Neither seems especially keen on increasing accommodation. Hence, though Powell is warning about the dire economic consequences of a delay to stimulus spending, he doesn’t get support from his two wingmen.
He’s also going down the same route as many investors when he makes a “when the vaccine arrives” comment. There’s a growing assumption of a ‘eureka’ moment from the pharma industry and a few weeks later the whole planet will have been vaccinated and back to normal. But it’s tough to imagine a vaccine’s rollout to the general public anywhere near fast enough. It’s also hard to imagine any scenario in the near-term where travel gets back to pre-pandemic levels, and even with a vaccine (or numerous vaccines) in the pipeline, there are gnawing concerns that we’re not in Kansas anymore, to quote Judy Garland.
Oil prices extended their gains after a surprising to consensus sharp draw in US crude stockpiles. Futures popped .5% in New York after gaining more than 2% Wednesday – precisely what the recovery doctor ordered.
Linking the strong China data – which is triggering a robust yuan response and simultaneously strengthening other Asian oil importer currencies (weakening the dollar) and OPEC+ oil-producing allies, including Russia, adhering to deep production cuts to counter the demand fallout caused by the coronavirus pandemic – there’s a bullish step in the complex.
Also, increased refinery activity in two of Asia’s colossal oil consumers – China and India – has boosted global oil consumption bullishly for oil prices.
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.
Consumption is starting to kick in huge in China. While China cannot carry the oil recovery on its own, it can certainly go a long way to bridging the gap until the US stimulus triggers.
With coronavirus cases accelerating in many countries, the magic bullet could be OPEC+ extending the current quotas into early 2021 rather than follow the scheduled ramp-down of curtailments – this would help in normalizing global inventories.
Oil tail risk
But the tail risk is how lawmakers deal with this Covid-19 surge, and the way consumers interact remains the wild card. While a return to draconian confinement measures is unlikely, the most prominent threat to the economic recovery is fear of the virus, not necessarily the soft lockdowns or social gathering restrictions. It’s fear that could keep people hunkered down until the curve flattens or the vaccine is available and it could sound a significant downbeat to the economy.
CNH, along with the Asia EM FX complex, rose as 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.
But much of the markets PBoC’s yuan push-back fear eased when USDCNH fell after Sun Guofeng, head of the PBoC’s monetary policy department, said recent yuan appreciation reflects China’s excellent growth environment; is seems the PBoC are happy to take one step back to achieve two steps forward. And perhaps this week’s PBoC push-back was nothing more than a not-so-subtle reminder that they still control the deck when it comes to who deals the yuan cards. But what trader worth their salt was going to short the yuan anyway?
China’s total social financing beats, along with a bullish response from the yuan, should see the ringgit strengthen today – even more so while getting a bullish push from higher oil prices after US oil inventories fell more than expected. But safe-haven US dollar demand vs. G10 and rising Covid concerns will continue to cloud the viewfinder and could hold the ringgit bullish ambitions in check.
It was telling yesterday when FX markets were unconvinced by the modest revival in risk appetite in European equities. So, when US stock futures turned lower before the US open, the dollar pivoted haven vouge.
This morning USD remains steady while participant indifference is palatable. It’s hard for the market to go all-in short USD right now on the Blue Wave hypothesis, mainly because 2016 polls were wrong and the Democratic Senate win odds are not convincing enough.
The EUR is mostly trading as a mirror image to USD sentiment vagaries, but it also faces growing local headwinds. Chief among these is the increasing number of Covid-19 containment measures that are being put in place across the Eurozone.
GBP recovered earlier losses in the London session after a person close to the negotiations said the UK would continue Brexit talks beyond the deadline. Cable popped above 1.300 after The Guardian reported an EU deal is still possible as a potential fisheries plan emerges. The UK chief negotiator, David Frost, will reportedly tell Prime Minister Johnson that another two weeks of talks could get them close enough to a deal.
With GBPUSD holding up well and front-end vol relatively contained, a breakdown in talks would represent the massively unexpected outcome. My caution on GBP extends beyond Brexit uncertainty as the cyclical challenges mount, including pressure for a national lockdown.
There wasn’t very much to direct gold prices initially. After falling below 1890 in Asia, gold began a long but uninspiring trek by grinding higher in Europe. Gold looks to be susceptible to market risk vagaries and a weaker Euro, but the economic climate and the anticipated US stimulus is gold supportive.
The US election and fiscal stimulus developments could be a more significant driver of price action over the next few weeks. But, as is so often the case, gold traders are a bit cautious about jumping back in the saddle after a sharp move lower. It looks to be fast money hitting both the tops and bottoms. Otherwise, so far, there’s been extraordinarily little real money involvement.
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