US equities finished slightly higher on Thursday as investors turn more optimistic on the possibility of a US stimulus bill that would provide a lively bounce to the economy at a perfect time: just as consumers turn downcast with the coronavirus showing signs of second and third wave propensity; just this weekend, the Notre Dame and Wake Forest NCAA Football game had to be rescheduled due to nine Notre Dame players testing positive for the virus. People need to be incredibly careful out there.
Adding to that, self-imposed social distancing can be a double-edged sword. Sure, it will keep the economy open, but if the rules aren’t followed, the piper will most certainly come calling in the form of more rigid mobility restrictions.
At this point in the recovery, a return to the Covid abyss due to stricter lockdown measures is quite frankly something the global economy cannot afford. After all, look at this week's stock market beat down on a return to March’s ultra-light level of mobility restrictions. I think we’ve dodged a bullet on this one so far, but this is not to say lawmakers who were slow to respond to the initial coronavirus outbreak will not re-impose stricter mobility restriction if the Covid curve steepens.
Before the street started to pick up on the more favorable stimulus overtones from Pelosi and Mnuchin, US equities had been climbing steadily since the open with tech and pockets within cyclicals/value leading the way by midday. AAPL is again setting the tone for tech. QQQs bounced off the Monday lows as traders look to de-risk short positions into the weekend.
Defensives outperformed out of the gate, although the last leg up seems more cyclical and value-driven. Many folks think this market can’t run without financials, so with financials acting better and tech finding support, one could easily make a case for a low-volume melt-up in the near term.
Not unexpectedly, it’s been a bumpy ride this week with investors worrying about the upcoming election, top-down concern over the US economic recovery and doubts about the prospects for Congress to deliver more financial aid for struggling Americans. Meanwhile, uncertainty over how soon drug makers will be able to develop a coronavirus vaccine is keeping that ultimate prize more of a pie in the sky at this juncture.
With the market momentum-shifting with lightning speed and often reversing on little more than a whim, it’s been a week for the nimble of the foot on the global trading floors after equities corrected lower and the USD squeezed on dampened prospects of further fiscal and monetary stimulus and the tightening of Covid restrictions in Europe – all as the economic data improvement has decelerated
To temper this, though:
1) The Fed target is still at the lower bound for an exceedingly long time, with real yields firmly negative
2) US stimulus will happen – it’s just a matter of when
3) We’re always on a path to a vaccine
4) Risk premium has been reflected in higher implied volumes, which should mean we’ll find ourselves in a broader range rather than headed back to the depths of the pandemic lows
The near-term catalysts outlook brings the first Presidential debate and payrolls data in the US forward as immediate concerns. If the polls tighten further, November risk premium shoots higher and a miss in payrolls will only add more fuel the data deceleration narrative.
But the situation is fluid and risk has already sold off a decent amount – and there’s some hope on the street today that Pelosi and Mnuchin may still try to reengage on stimulus talks. For now, we keep an eye on the recent ranges and rely on our signals to pick and choose our spots before taking outright directional views.
There were no easy pickings to be had this week, but fortunately it brings to end my five days of pain view so tonight’s a good time to go out for a nice dinner.
Yuan bounces on the FTSE news, but curb your enthusiasm.
This morning FTSE said that China's CGB bonds would be added to its flagship World Government Bond Index, with the inclusion starting in October 2021.
USDCNH is selling off on FTSE Russell's confirmation of China's WGBI inclusion. This is a medium-term positive and it’s undoubted that sharply-higher bond inflows recently have been a critical driver of RMB appreciation in the context of the US-China real yield gap.
This is big news. FTSE has the farthest reach and is one of the most impressive indexes since it has a massive AUM tracking and is chock-full of passive and mega real money managers that comprise and mark to mark the fund, and it does open up China's 1.5 trillion bond market to a broader band of passive investors.
With approximately 2.5 trillion in AUM tethered to the WGBI and based on current CGB weightings – between 130-150 in CGB allotments – assuming the flow averages over the next 24 months, that would mean 5.4 - 6.25 billion in inflows per month.
But factoring in the direct currency market impact is not a straight-through process as passive type investment style managers fully hedge their returns via Forex. Still, there will be an element of unhedged positions as Bond managers who cannot trade Forex will buy CGB to access the Yuan. So, while favorable for the Yuan, but in no small degree, much of this has been priced in for the immediate bounce.
The US dollar weakens on US stimulus hopes as that optimism adds more levels to the towering skyscrapers of twin deficits. And with the market buying all the EUR selling flows with relative ease, I suspect US dollar bulls are packing it in for the week with global risk sentiment getting a spark from US stimulus hopes. So, we pivot back to US dollar selling as risk improves. Indeed, it is another fickle day in the currency markets.
But hold your dollar bearish proclivities back a bit. As I flagged earlier in the week, US equity markets have significantly underperformed their G10 counterparts in September: SPX is trailing SX5E by around 5% and NKY by more than 7%. Consequently, my month-end indicators suggest that equity portfolio rebalancing should lead to USD buying into month-end
Outside of the FTSE MGS inclusion, which I have no news to report at this time at the time of writing, please do reach out for comments.
The political jockeying in Malaysia remains the most significant cloud in the sky for the ringgit. Still, with oil prices stabilizing higher and the US dollar trading slightly weaker, we could see the ringgit trade more favorable. It’s also expected that Malaysia bonds will not be excluded from the FTSE flagship WGBI.
Even as the dollar buying eases a bit, metals opened in Asia today with retail/brokers and banks selling again – although volumes are low.
The US dollar will likely be in demand through the month-end rebalancing, but even then there’s more conviction building in the market now that the USD weaker theme from last month is coming to an end.
Gold is still struggling and underperforming, but let’s see if its recent positive correlation to equities and risk prevails. I expect that behavior to be a function of positioning and the dollar. Having said that, the correction has come quite far now and I’m not sure there’s enough bearish sentiment in the tank to test out the key $1,830 levels this week.
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