Asia Market: The abyss awaits as lockdowns loom

Market highlights 

• Headlines offer unavoidable and poignant source of market angst, with politicians left with few options but to reimpose stricter confinement measures
• Pre-election US stimulus package looking all but a pie in the sky
• Oil traders positioning inverse to the Covid curve
• Virus surge likely to see December projections calling for additional policy action
• Gold momentum falls prey to the possibility of EU nations’ lockdowns 

The Endless Gloom of Coronavirus Headlines
 The various rolling coronavirus newsfeeds are a very depressing place these days and an unavoidable poignant source of market angst. England's Covid-19 deaths jumped five-fold in 4 weeks; Arizona’s new daily cases are back above 1,000; Florida's average daily Covid cases hit its highest in two months; Switzerland risks running out of intensive care beds in 11 days. 

Politicians have no choice

While the market had expected this second wave and attempted to factor it into the equation, hoping the improved medical response and lessons learned from March would contain the spread, the severity of the second wave's is still catching both the market and the medical community by surprise. But it’s the latter that’s the scarier proposition. Soft lockdowns are always a double-edged sword as they keep the economy open, but empowering people with personal Covid safeguarding has proven challenging in the west. 
 
The virus spread is now so rampant that politicians will have few options but to reimpose stricter confinement measures. French President Emmanuel Macron will announce new tighter mobility restrictions on Wednesday night, with speculation rife that he’ll impose a new nationwide lockdown on the country as France battles against the second wave of Covid-19 infections that some health chiefs say is now 'out of control'. Now the economic danger will no longer lurk in the dark but will occupy all corners of everyday life. For many industries that were already on the brink of collapse, this could ultimately be their coup de grace. 
 
Investors were ok when the Covid fears lurked in the curfew dark, but with those fears now seeing the light of day they’ll also fester in the darker corners of the market's minds. 
 
The return of "Sudden Stop" is the nightmare that keeps investors awake at night. That fear will play a considerable role in the market's mindscapes over the next few weeks. And one would have to believe, with numerous sources of uncertainty beyond Covid hobbling the sentiment, that it will be difficult for investors to get off the mat from another Covid mortal blow. 
 
Here we go again
 
Risk reduction continues, with a pre-election US stimulus package looking all but a pie in the sky. However, the evolution of European Covid restrictions mean significant economies are about to topple back into the Covid sudden stop abyss that sees the market awash in red. While compounding the gloom, it feels like the market is trying to go into next week's US election as light as possible. 
 
Risk assets are flashing red across the board again this morning as the dollar turns bid, with growing Eurozone double-dip recessionary fears sending risk aversion shockwaves around global financial centers and leaving little doubt that the December projections will be calling for additional ECB or Fed policy action, which could cushion some of the falls. 
 
I don't foresee any significant change or pick-up in activity heading into the election unless there’s news on the vaccine front (Pfizer is unlikely to have preliminary vaccine data until after the election), a surprise pre-election stimulus pivot, or major earnings-related dislocations in mega-cap tech later this week, considering how widely these names are owned. 

Oil Markets

With the increased threat of mobility restrictions similar to those imposed in 1H20 and the consequential level of impact on oil demand still fresh in the market's mind, oil traders will have little option but to position inverse to the Covid curve as politicians around the world remain pressured to reimpose stricter lockdowns to stop the spread of the virus.
 
The doomy mood music's soundboard remains tuned to growing concerns about rising Covid-19 case counts, and reflationary hopes are fading fast with French lawmakers taking a frightful economic step back into the Covid full stop abyss and likely to impose nationwide lockdown with the Eurozone's economic juggernaut Germany likely to follow suit. 
 
Of course, this will bring discussions forward regarding whether OPEC will make deeper cuts. I suspect that unless there’s unequivocal proof that global demand is contracting, it could only occur if draconian lockdown style measures get reintroduced in major oil consumption economies. So, we might be entering the realm of that possibility.  

Forex

It feels like the market is finally taking the global surge in Covid cases a bit more seriously.
 
These are incredibly challenging times for European policymakers. Virus-related lockdowns are once again becoming a reality across the continent, weighing heavily on the short-term economic outlook. The September optimism is gone, including at the ECB. There can now be little doubt that the December projections will be calling for additional policy action. Headline inflation is negative, and inflation expectations have once again dropped from their temporary summer high.
 
And with European economic juggernauts France and Germany about to announce tighter social mobility restrictions, downside risks to the region are growing, framed by an 8% rally in EUR on a real effective exchange basis since the February 19 lows. As a consequence of these national lockdowns, they will trigger a nasty downside economic cycle for the Eurozone, relative to the US, which could dominate and drive downside in the Euro crosses, at which point you could probably kiss your long EURUSD position goodbye.
 
It was a terrible start to the week for European stocks, with indices tanking as the second wave hits countries across the continent hard, but FX didn’t move much initially. However, with France about to turn back the clocks to March’s sudden stop, it looks like Forex traders are starting to put on the pre-Halloween Eurozone fright faces as we move ever so closer to entering the frightening Covid freefall.

The Yuan
 
China will remove the counter-cyclicals factor in its yuan fixing. Such a move means USDCNY should generally fix higher.
 
The removal of the element would imply greater FX flexibility. It last suspended using the factor in January 2018 (after a long-running selling in USDCNH from end-2016) before resuming its use in August 2018 after a rally that year from a low of 6.25 to 6.94 in August. The market's initial take is to push USDCNH higher, using the 2018 template.
 
The Ringgit 
 
Risk aversion is starting to grip the global markets due to Covid fear in the west and flashpoint around the world. A palatable US election level risk is seeping with uncertainty into Asia FX markets after China levied US interests sanctions this week. Compounding matters, and slightly bearish for Asia FX, is the PBoC trio of pushbacks to CNY currency strength; the latest amber light removes the counter-cyclical factor.
 
But just as problematic for the ringgit is the fall in oil prices, especially as focus turns to the 2021 budget where oil revenues are a necessary support for the government coffers.

Gold Markets 

The weaker USD and lower yields initially boosted gold overnight. Still, momentum has fallen prey to the possibility of EU nations’ lockdowns, triggered by a marked departure from the Euro. 
 
And with gold investors not banking on pre-election stimulus – and that may even get delayed if the US elections results are contested – EURUSD levels might be a crucial bellwether for gold. 
 
While the return of curfew type containment measures in the Eurozone has not notably unnerved the EUR bulls so far, the imposition of national lockdowns could see the Euro topple and provide the magnetic attraction to drag gold lower. But I would be just as concerned about a mini repeat of the March lockdown sell-off. If nationwide lockdowns become the norm, the deflationary impulse and the ensuing dash for US dollars could send gold down to $1,800.