US equities were down slightly on Thursday, the S&P down 0.2%, while US10Y yields were up 1bp to 0.73%. There were more significant moves through Europe, with the Stoxx600 down 1.7% and German 10Y products fell 3bps to -0.61% – the lowest since March. Softer sentiment there came amid growing second wave virus concerns. 

Asian stocks look set for a mixed start to Friday as traders digest the latest news on US stimulus negotiations amid a resurgence in coronavirus cases in some parts of the world.

Despite economic and Covid-19 thunderclouds ominously looming over the market, investors took comfort in the fact that a US stimulus deal most certainly remains on the table after House Speaker Nancy Pelosi told Democrats that a Covid-19 relief package wouldn't wait until January as she was scheduled to have another call with Treasury Secretary Steven Mnuchin, while President Donald Trump said he'd go over $1.8 trillion in the stimulus. 

The markets’ 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 trouble of all, the second wave of the coronavirus that could trigger more intense lockdown worries.

Also, investors are struggling to set aside the implications of vaccine trial setbacks – even more so without the comfort of a US stimulus package safety net that always conveniently papers over Covid’s wall of worry and eases pandemic fears.

But with the March coronavirus crash still not a distant memory, the French curfew spooked investors. At the same time, London is also moving to Covid Tier 2 this Friday as politicians call for further national circuit breakers. In other parts of Europe, Germany's new case count increased by a record daily amount, as did Italy's. While some of this reflects far more widespread testing than seen earlier in the year, the acceleration is proving sufficiently worrisome to provoke new containment measures.

Arguably, the recent market gain was overextended, rallying on an NDX-led gamma move, as investors started to price in a lower chance of contested US elections, given Biden's poll lead. Still, investors remain confident that even if a stimulus deal is not imminent, the first item on the Democrat agenda post-election will be to rubber-stamp a mammoth stimulus package.

In February and September, the market sold off very aggressively after expiry as protection rolled off. Are we in the midst of a repeat performance in October? 

US inventories: Big falls across the board – aided by Hurricane Delta

Crude stocks fell by 3.8mb last week as lower crude production (due to Hurricane Delta) offset lower refinery throughputs. But bullish for oil markets is that product demand has been improving over the last month compared to seasonal norms, with consumption improving gasoline and distillates.

The recovery in risk markets on stimulus talks also echoes in oil markets. And, beneath the choppy surface, China's data for September so far is indicative of an economy firmly in a cyclical upswing and supportive for all commodities, including oil. 

Oil prices roared back from the depths of Covid despair as diminishing US oil and product stockpiles offered up some glimmer of hope that the fragile demand recovery is rebalancing at a better pace than expected in the USA, which is the world's largest oil consuming country. Indeed, a significant draw in commercial oil inventories – with a notable draw in distillates – helps drain those elevated product stocks bullishly for prices.

There have been reports of a push for a delayed easing of production cuts (about 2mb/d of production returning in January in the current plan). Still, critical players in OPEC+ recognize what’s at stake. There’s a high probability of a supportive decision from the OPEC+ meeting at the end of November if the demand outlook remains cloudy, especially with Covid spreading rampantly across Europe and flashpoints igniting in other parts of the world.

With Covid fears ravaging the world, I’m unsure if an OPEC extension of current quotas will still be considered the magic bullet for the oil price. However, it will provide a significant crutch for the market to lean on. OPEC's Secretary-General Mohammad Barkindo suggested the "OPEC Put" remains alive and well when replying to a question regarding whether the market could handle another two million bpd (barrels per day) if OPEC+ further relaxes the current cuts in January as planned.

Currency Markets

The Chinese Yuan 

USDCNH is a trading bid at 6.7020-7220. Swaps went lower as the People's Bank of China injected more MLF and China inflation data missed consensus expectations. Funding has eased to 4 pips a day from 8 pips at the open. Forward/forwards are relatively supported as rates yields rebounded after the initial reaction.

After getting their hand caught in the cookie jar below 6.70 earlier in the week, I honestly do not sense local FX traders have a big axe to grind ahead of the plenary.

The Malaysia Ringgit

The ringgit looks very rangebound amid the competing narrative. On the positive side of the equation, risk sentiment is backstopped again on hopes for a  stimulus providing the bounce to global stocks and oil markets overnight. Also, the China economic lift-off is being viewed favorably by investors and is also ringgit supportive.

Still, demand safe-haven dollar as Covid storm clouds gather over Europe is holding the ringgit back.  

The Euro 

A marked "risk-off" mood in Europe has prompted renewed safe-haven buying USD, although the factors driving the angst are not new. EUR-USD dropped back to support at 1.17 as the news flow on Covid-19 highlighted additional headwind risk to growth which complicates life further for the ECB as it battles to prevent inflation expectations becoming de-anchored.

The British Pound 

GBP is weaker against the safe-haven USD but the pullback and sideways move in EUR-GBP shows no fundamental reappraisal of GBP, despite all the headlines.

The Australian Dollar 

The AUD is sharply lower overnight on the "risk-off" mood and also due to local factors. It’s not easy to decrypt the relative vigor of global and regional drivers behind the 1.2% drop in AUDUSD overnight as they mostly pointed in the same direction. But with the RBA now entering a two-person dovish policy race for the yellow jersey with the RBNZ, I suspect the Aussie is struggling due to the sound of rate cut alarm bells in the distance.

Gold Markets

Gold is recovering on stimulus hopes while trading in lockstep with US equities. Gold looked shaky in London with EU stocks tanking. Still, with the House Speaker looking to repair her image after her embarrassing performance on CNN when Wolf Blitzer called her out for not taking the President’s 1.8 trillion deal, maybe the stimulus tides are changing. 

We’re just range trading as traders try to decipher the numerous yield curve regime shifts that might – or might not – happen post-election. But all roads will eventually lead back to the FOMC 's AIT; the confusion at the Fed is not helping matters. 

Indeed, the Fed’s messaging has been unusually confused of late. While all Fed members are on board with average inflation targeting and enhanced guidance towards the labor market and inflation, there are divergent opinions on the extent of an inflation overshoot, the recovery time, and the outlook's strength.

The main problem is the power trio of Powell, Clarida and Williams – who effectively provide the Fed's joint leadership – are not singing from the same song sheet.

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