Asia Update: Honeying aspects of fiscal policy on display

Overnight Recap  

US equities were stronger Monday, the S&P up 1.7% with about 30 minutes left before the close. Helping sentiment was a favorable prognosis for the President Trump's Covid-19 infection; at the time of writing, he had just returned to the White House. The better sentiment was also reflected in bonds, with US10Y yields rising a notable 7bps to 0.77%. Oil lifted 5.9%.
 
Oil Markets  

Oil prices rallied in line with broader markets, surging the most since May. The rip higher was primarily driven by optimism that fiscal relief is on the way and will provide the desperately despondent oil market with a much-needed fiscal put through to boost energy demand. 
 
In the wake of President Trump’s Covid-19 prognosis, House Speaker Pelosi hinted that his medical situation could alter a new stimulus deal's current course of thought. Indeed, The House Speaker will not want to be seen as holding up virus-related spending, and the Democrats could lower their spending demands.

The US stimulus continues to fend off the oil markets bears, but the fiscal impulse has also lessened the virus's fear, offsetting the negative news around tightening social mobility measures.
 
Elsewhere, a strike in Norway will remove 300,000 barrel of oil from the global supply. And favorable for jet fuel demand are nascent signs that Asia travel is starting to open up; South Korea and Japan will agree to a reopening of business travel between the two countries.

 Equity Markets

All the honeying aspects of US fiscal policy were on display overnight.

In a similar vein to oil markets, the US fiscal impulse has seeped into virtually every nook and cranny of capital markets worldwide. US equities saw a fairly broad move higher out of the gate as Washington remains in the spotlight – and it’s all about stimulus and the election. 
 
Energy is in the lead with crude up 6%. Tech is acting okay. Hence, momentum is still on the charge, but today there was more of a cyclical bias as rates move higher, the curve continues to steepen and financials caught a bid. When banks see a bid, stock markets do tend to fly. 
 
Infrastructure names and inflation beneficiaries are outperforming, too, suggesting that it’s primarily stimulus hopes carrying the tape and new money is flowing there, which is the modus operandi of a stimulus pump.
 
The ongoing rise in Covid-19 cases and increased lockdown measures weigh on the reopening trade, mainly travel and leisure names. Activity remains subdued – US composite volumes are 15% below an already declining 20-day moving average, suggesting investors – at least from an all-in perspective – could be starting to respect the tail risks at hand with crowded tech much better for sale on profit-taking and rotation into cyclicals as all the lavishes that come with a fiscal deluge were on full display. 
 
Currency Markets  

With less than a month until the US elections, and in the wake of the presidential debate, traders have pivoted to the still considerable gap – although arguably now beginning to narrow – between the markets' pricing of a Biden win and his consistent lead in the various opinion polls.

The 'time decay' is arguably in favor of playing catch up trades on different reflation trade scenarios.

While the news flow around the President's health almost certainly widens the tails around the median outcome, as we rapidly approach the November date the markets could be increasingly biased to buy currency dips, if not building 2021 consensus US dollar shorts. 
 
The USD is weaker this morning as risk appetite rises, triggered by diminishing US election uncertainty and optimism around a US fiscal stimulus. New opinion polls show Joe Biden has increased his lead over President Trump, with the WSJ/NBC poll showing a record 14ppt gap. The latest Reuters/Ipsos showed a 2ppt increase in the gap to 10ppt. The strong lead suggests a lower risk of a tight result, reducing the likelihood of a contested outcome.
 
With election risk premiums falling, which has held FX currencies at bay, the market might be pricing in the regime shift in FX after two months of consolidation, thinking now could be the time to buy EUR. Real money is believed to be heavily underweight, short-term positioning has flattened, and technicals look fair. 
 
USD weakness in 2021 remains a slightly blemished consensus, but it’s going to take a policy shocker to shake the market off the USD dollar bearish axis.

USDCNH and USDTWD have remained a favorite dollar short in Asia, and I suspect Asia FX negative dollar bias will soon be contagious across G-10.
 
The Australian dollar 
 
Commodity-driven equity markets and their related currencies could be applauding fiscal spending expectations like the Australian dollar. 
 
The British Pound 
 
GBPUSD traded very choppy overnight but, in the end, is somewhat stronger against a retreating USD. Brexit headlines are plentiful but not mostly unchanged in terms of content. Encouragingly, and unsurprisingly, talks are set to continue beyond last week's "final" round. The tone from all the chief protagonists continues to express more willingness to get a deal done. 
 
The Japanese Yen 
 
While the cross-asset market focuses on the grander aspects of fiscal spending (higher stocks), FX traders focus on what yet another fiscal deluge will have on bond markets, which could drive a bear steepening in the UST curve that encourages USDJPY upside.
 
The Malaysian ringgit 
 
The US fiscal impact on EM assets, particularly commodity-driven currencies like the Ringgit, could be flattering if oil prices and risk appetite continue to gush. 
 
Gold Market
 
Gold prices received a boost from the weaker US dollar, but mainly as the dollar drops against the EUR. The market is beginning to price in a likely US fiscal response and a Biden presidency that could be inflationary from a fiscal respect and a tax redistribution perspective.

While my $1,960 target is still on course, caution needs to be exercised again. Rising US yields could present the most significant obstacle as the market will start to price in term premium with more issuance coming to market amid growing concerns the Fed will not continue to monetize all debt.

For example, actual 10-year yields are up over .10 basis points this month, but offering the rise is a bump in inflation expectation and surging commodity prices on reflation trade expectation, which provides the real rate offset. 

It's been an exciting session with news President Trump is on the mend reversing Friday's risk-off trade in stocks.