- Markets trading higher (albeit cautiously) in line with stimulus-before-election theme
- Need a hedge? Try strategies where the bid on cyclical market dips supports US stocks
- Cross-asset price action paints clearer picture of what a Democratic sweep could mean
- Uh oh, it’s debate time again! But which market sectors are the ones to watch?
- PBoC intervention with the QDII gives CNH a lift
Markets are trading higher, albeit cautiously, in line with the current stimulus-before-election theme as stocks ebb and flow on the unwind and rotations swivel. But investors appear to be making time to eventually man the cash boats.
US equities were stronger on Thursday, recovering 0.5% after the small losses on Wednesday. With no breakthrough on stimulus talks overnight, equities continued their whipsawing pattern. The street is moving to and fro with unwind/rotation in US equities on Thursday, continuing the trend seen over the past two days. More notable action could be seen in the bond market, with US10Y yields lifting a further 4bps overnight to 0.86% and 30Y results up to 1.68% – the highest since early March as term premiums continue to get packed in.
Earnings still count
There have been some noteworthy reactions to third-quarter earnings from US industrial stocks again today. Once again, the mixed/poor results are getting punished. Indeed, the bar is relatively high for this EPS season as the uncertainty engendered by the election, alongside never-ending stimulus headlines, leave little room for error.
Trading Day Views
Markets might continue to trade cautiously in line with the current stimulus-before-election theme. Pelosi and Mnuchin will continue their discussion today, but Senator Mitch McConnell made no promises on whether the Senate will pass the compromise agreement – even if they do put it to a vote.
Joe Biden's growing polling lead has coincided with marked outperformance in the Biden win stock baskets. But investors have become increasingly selective around portfolio positioning as the election day draws near and they mull the implications of a possible Blue Wave and, importantly, what a Pro-Cyclical shift will mean for stock markets.
Still, investors continue to struggle to decide whether a Biden presidency is anti-growth or not; some days they give the benefit of the doubt that stimulus is better for everything, however, with some growth stocks struggling in the face of higher long-end rates amid the corporate tax and regulation fears, this may paint an accurate picture of what a possible 'hard rotation' out of growth stocks post-election day looks like.
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Both sides remain at the stimulus negotiating table as neither benefits from pulling away. But with the Republican Senate unwilling to compromise on the thorniest issues of financial aid to states and liability protections and Pelosi unlikely to hand Trump a victory this late in the game, unless a surprise occurs before Friday sundown at the Last Chance Saloon, neither side may be negotiating in good faith.
What Cross Assets are telling us
The cross-asset price action this week paints a clearer picture of what a Democratic sweep scenario could mean:
- Equities mixed on the prospect of higher corporate taxes
- Yield curve bear steepening on higher fiscal deficit spending hurting growth stocks
- USD down on the reflationary impulse
- Less geopolitical risk on a more muted foreign policy response from Biden
Uh oh, it's debate time again...
In case you needed a reminder, do not forget about the final presidential debate in Nashville at 21:00 ET. After the first debate, Consumer Discretionary, REITs and Utilities rose the most, while Energy, Defense, and Pharma underperformed.
After the market took fright from the build on gasoline warehouses and the implied weak demand at the pump underpinning the numbers, the overnight price recovery should be a reminder that it’s dangerous to draw a conclusion from a single week's data run – especially when the numbers are Hurricane distorted in a mishmash of supply and demand devastation. Still, yesterday's reaction to the DoE inventory report, which was not all that bad, emphasizes sentiment fragility.
Despite Covid-19 rearing its ugly head and negatively impacting Europe's mobility trends, prices remain gingerly supported by China consumption, complemented by a possible OPEC quota extension and optimism over the reflation impulse from the eventual US stimulus pump.
Given the low probability of a pre-election stimulus, oil bulls could be deferring to the medium-term outlook where supply/demand balance remains positive, with the OPEC+ production agreement more than offsetting expected production upside from Libya and others in 2020/21.
Oil received a boost overnight after the Kremlin suggested it was open to extending the current quota if the situation warranted.
One would have to assume the OPEC+ decision will depend on the price/curve shape outcome for November. Traders remain unwavering that OPEC will continue to defend the downside for oil prices via a more calibrated monthly market evaluation and inventory management approach. OPEC hopes to tighten near-term balances push spot prices higher than "forward prices," the elusive backwardation, encouraging inventory draws. My view is until this occurs unambiguously, OPEC will cover the market’s back. Positively for OPEC compliance concerns, all the pump-happy members appear to follow the compensation principles.
Still, oil is likely to remain range-bound until a sustainable recovery in demand or all the mobility dominoes topples lower. Because of this, oil prices will continue to be stiffly influenced by news flow about coronavirus, progress on a vaccine and the US presidential vote.
US drivers to risk sentiment and the USD provided a somewhat mixed picture overnight. The risk of a contested US election edged higher on the disclosure by John Ratcliffe, the US director of national intelligence, of evidence of possible foreign interference in the upcoming US election. The "risk-off" vice of a contested election had dwindled in the last couple of weeks alongside the Democrats continued strong showing in polls. These headlines pushed the risk of a contested outcome back onto the market radar; indeed it halted the race for Blue Wave short dollar positioning.
The "risk-off" mood in European equities continued yesterday, putting a lid on this week's rally in EURUSD. Much of the news flow out of Europe remains familiar and concerning.
Germany and Italy recorded another record day of new Covid-19 cases, but just as worrying for the Euro were gnarly economic signals out of European data overnight. The French INSEE survey for October was down 2pts, weaker than expected. In the details, the services index fell 5pts to 89 (the long-term average is 100) and back towards its July level, and most forward-looking indicators worsened: expected turnover fell 9pts, expected employment fell 6pts. The flash estimate for euro area consumer confidence in October was weaker-than-expected, suggesting the rebound observed over the past few months might have come to a halt.
And don’t forget the ECB is on tap next week. With Covid cases and activity restrictions rising, the ECB could start hinting at further policy stimulus in December. We get data out of Europe that could help shape the path forward for the board – advanced PMI today could be a critical tradable event, as will next week's GDP data.
The British Pound
GBP has held onto the bulk of yesterday's gains, prompted by confirmation that Brexit talks would resume. The talks are expected to continue through the weekend, but what little time remains as month-end approaches will dictate whether the EU olive branches translate into an agreement. But a large contingent on the street continues to view GBP's risks as asymmetric to the downside post these Brexit talks. Still, this week's bullish GBP response shows that an agreement is not fully baked into the Brexit Party Cake. So, sterling bears are likely sitting tight, waiting to fade a frothier Brexit bounce.
The Australian dollar
The AUDUSD has a bounce in its step this morning, boosted by both the risk-on sentiment in US stocks and the Blue Wave reflationary impulse that sees commodities ripping higher. Even with the market expecting an RBA shift towards RBNZ-styled QE, it’s always hard to fight commodity market moonshots when it comes to the commodity block currencies. I think this is causing many on the street to re-rate the Aussie in their Blue Wave currency playbooks.
The Chinese Yuan
The focus will be on the fix today after yesterday's QDII smoothing operations. Despite the PBoC’s push back, the CNY likely has more in the appreciations tank. RMB strength should continue to find support from fundamentals, with strong export growth, more moderate easing from the PBoC than other central banks, and the opening up of China's financial markets eventually leading to fewer capital outflows, the PBoC is sending off short term rip tide messages.
The Malaysian Ringgit
A bump in oil prices overnight should lend support to the ringgit, as will hopes for more US stimulus post-election. But overall currency sentiment is being held back by Covid fears and the usual mix of US election uncertainty, where more sinister claims of voter tampering are surfacing, which pushes the contested election narrative back on the market's radar.
As most Yuan watchers had expected, China FX regulators instituted currency smoothing measures, issuing about $10 bn in new Qualified Domestic Institutional Investor (QDII) quotas in several batches. The annual total would represent a 10% expansion of the program; the agency issued $3.36 bn of new quotas last month, the first in a year and a half. This move encourages domestic institutional investors to put more money into foreign capital markets as the yuan appreciates strongly against the US dollar amid accelerating post-pandemic inflows.
The CNH lifted 200+ pips on the news as this is the second such push back in as many weeks. And while it's not known if the PBoC institutes a ‘three strikes, you’re out’ policy rule, history tells us not to take on China's Central Bank when they start rolling out sequentially stronger policy hints.
Of course, the weaker yuan is exerting its usual degree of gravitational pull across Asia FX and G-10.
The pre-election stimulus impasse continues to hurt gold prices, as do higher US yields, and the dollar continues to consolidate a very lackluster currency session overnight.
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