Fading prospects for US fiscal stimulus and the stepping up of mobility restrictions surrounding concerns about the second wave of Covid-19 are smacking global stock markets again.
The NASDAQ got hammered after the US Department of Justice submitted a proposal for Congress to curb legal protections for tech companies and compel them to take more responsibility for site content, following President Donald Trump's bid from earlier this year to crack down on tech giants and no longer absolve them from liability over content posted by users. The regulatory overhang is such an imposing factor and extremely difficult to put on the backburner.
Added to that, and in a not too subtle reminder that we are still smack dab in the Covid abyss, a procession of Fed speakers voiced more concerns about the ongoing impasse on additional fiscal stimulus. But it was Fed Vice Chair Clarida that might have delivered the harshest reminder when he noted the "economy is recovering robustly, but we are still in a deep hole." Indeed, that stern warning pains even the most bearish eye.
I think the Fed's piercing cry for more stimulus brings attention to conversations and questions that have been swirling for a while. Specifically, risk market losses, especially US equity losses, signal that all the possible juice that can be extracted from declining real rates has already been squeezed.
That and Clarida's messaging provides the most distinct read on the global economy, inferring the world has probably just seen the bounce from a sudden stop – not a cyclical recovery but merely a restart. Hence the unquenching need to buy a dollar as the world is still in Covid purgatory.
US Election Risk
Short term, the dollar remains key as the Greenback rebounds, as we have seen of late, and the damage done to many macro trades brings attention to the system's significant amount of leverage; I think gold was the first leverage domino to fall.
Still, we need to keep a close eye on proceedings as we move into early weeks of cover where the chance for a significant risk even increases with US election risk coming to the fore. While the dollar continues to grind higher, expect broader risk to struggle to push on.
There’s a remarkable tendency for fear to build and volatility tends to rise about four to six weeks before voting events – even if we have talked about them for months ahead. We saw this with the Scottish referendum, Brexit and the 2016 election, for example. There’s always a bit of a panic attack, but this year is getting compounded when viewed through the coronavirus lens.
Technicals In Driver's Seat for US Equities
For US equities, technicals are in the driver's seat today.
QQQs failed again to climb back above the 50-day moving average earlier on, then turned and dragged the rest of the tape lower with them. The three-week downtrend is intact despite the bounce over the past two days. There’s not much conviction out there; look at the surging US dollar and look no further as that’s evidence enough. The regulatory overhang for GOOG/FB/AMZN is a factor. Some of that short gamma trade is still out there and is having an impact as well.
USDAsia currencies shot higher overnight after USDCNH broke 6.81, triggering a gnarly string of stop losses almost hitting 6.83.
Rule 101 in FX trading is never fade a central bank surprise. Well, we had two pushbacks on that front from arguably the two most influential central banks in the world: the PBoC fixed the Yuan weaker, and Fed Evans threw the proverbial a monkey wrench into the AIT when he suggested the Fed policy allows for rates to move higher before inflation averages 2%.
We know what the long-term linchpins are for dollar weakness, but that’s not the case today. The broader markets have a minimal appetite for holding risk, so it seems the US dollar is the go-to hedge trade.
On the ringgit, the cloud that never leaves Malaysia's political scene turned a bit darker yesterday, but Malaysia's capital market has matured over the past decade and will continue to be guided by a strong central bank presence. Political risk seldom has any lasting legs and, were it not for other external factors – including a weaker Yuan and precipitous fall in oil prices – the MYR sell-off would have been faded in greater earnest.
As for today's WGBI impact, that market has priced in a worst-case scenario that MGS will remain on the watchlist; anything other than that will be the tradable surprise.
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