Asia Macro: Sights on stimulus after the market’s monster mash

Yesterday’s market monster mash had all the hallmarks of retail panic on the street where big fast money traders at the banks were more than happy to oblige and add to the negative momentum. But the rebound has the signature of deep-pocketed long-term investors who care little whether the stimulus package happens now or in November. They’re merely content to punch their ticket to the Stimulus Rally Bus when discounted opportunities present as the relative performance of stocks most sensitive to fiscal stimulus news shifts is still well below June highs, suggesting there could be about 15 percentage points of relative upside on the passage of a broad stimulus package.

Of course, the market’s on again off again love affair with an impending stimulus torrent masks the fact that investor uncertainty is bristling ahead of an expected choppy period in terms of headline risk, including Brexit, the US election, and perhaps the most horrifying troubles of all, the second wave of the coronavirus that could trigger more intense lockdown worries. And we shouldn’t be surprised if we see more profit-taking from tech winners to top up cash for cyclical binges. 

In the absence of a US stimulus package, we should approach the next few weeks with caution – markets were overly consensus around a Democratic sweep and that entails a more massive stimulus package. Still, it may be difficult for markets to trend too far in either direction without an actual outcome at this point.

Covid-19 vaccine sentiment has taken a step back amid a combination of rising cases globally and some setbacks in vaccine trials. Still, it keeps an eye on next week's FDA/VRBPAC meeting (October 22) – the threshold may be low for some positive news at this point.

Oil update 

Outside of bullish for oil inventory draw, China imports and implied demand recovery continues to resonate, while signals out of the OPEC+ leadership that the focus remained on compliance and hints that the scheduled tapering on January 1, 2021 may be pushed out also resonate.

But the bottom line for oil is relatively straightforward: it’s hard to imagine any scenario in the near-term where travel gets back to pre-pandemic levels, and even with a vaccine in the pipeline, it’s going to be an arduous grind higher even if we do lift the anchor from the current ranges in 2020.

According to sources on the ground, Libyan oil production has reached 500kb/d, up from less than 100kb/d just a few weeks ago. Libya is exempt from OPEC+ production quotas, and the prospect of an extended period of political stability and production potentially above 1mb/d (though it’s hard to know what the "new normal" looks like for Libya) will increase the pressure on OPEC+ to delay the planned easing of production cuts in January.

Currency Markets

PBoC fix is currency neutral, suggesting the current price action is trading within the central banks' comfort zone.