Asia Update: Stocks fly as banks finally take off

Stocks

With the prevailing attitude in the market that stocks cannot fly unless banks take off, financials did not disappoint overnight, leaving a chorus of unsuspecting but welcoming investors agog as the S&P roared +1.6%, with bank stocks among the better performers. 

It was a similar theme in Europe, with a 2.2% rise in the Stoxx600 – the most robust rise since 16 June – with financial stocks also underpinning that. US10Y yields unchanged at 0.65%. Oil and gold were up.
 
Positive news around HSBC and Evergrande boosted sentiment, with shares in both firms rallying. Indeed, this appears bouncy enough to offset Friday evening's announcement that the US is set to impose export restrictions on China's largest chipmaker, SMIC. The positive news in Asia has floated markets globally, leaving stock market investors jumping for joy as risk turns on in a risky world. 
 
Still, it’s "much more." That’s a rough estimate of what Nancy Pelosi needs to hear from Steve Mnuchin if the White House wants to strike a deal with Democrats on another round of virus relief before the election.
 
The two sides are either eons apart or debating over nothing, depending on how you conceptualize a difference of a few trillion dollars in deficits and debt after House Democrats, as expected, unveiled a "new" $2.2 trillion proposal,.
 
But bickering about the degree of lather – be it a keystroke $1.5 trillion or the voluminous pie in the sky 2.2 trillion – these conversations are wildly bizarre when viewed through an MMT or even a moral lens; come on, folks, just put a number out there and add to it when the next Covid storm clouds appear over the northern hemisphere. Congress needs to end the ongoing bipartisan political brinkmanship, otherwise investors will turn ice cold well before the first polar vortex hits.  
 
Currency Markets 

The US Dollar

A risk-on mood in global equities is echoed in some USD weakness, but the move's reach is still modest. 
 
Traders now turn to US politics where opinion polls over the weekend (e.g. WaPo/ABC) continue to show Joe Biden leading President Trump by a margin of 6-10ppts, depending on the cohort questioned. 
 
Traders are also weighing some unflattering headlines for President Trump as news surfaced that he paid only USD750 in income tax in 2016 and 2017. While it’s unlikely to be the final nail in his re-election coffin, the topic is likely to feature in tomorrow's first US presidential debate and could hurt his chances in a big way. Hence the Greenback has sold off on muscle memory that a Biden presidency will be bad for the dollar. 

The Pound

The GBP's surge seems at odds with the increasingly challenging Covid-19 picture, as well as dovish rhetoric from the BoE, but into the tunnel we go.

Sterling pushed higher after London traders had a chance to chew on various reports over the weekend suggesting that, following this week's Brexit negotiation round, there is the possibility of going into a 'tunnel' until the Oct. 15-16 EU Summit; that’s diplomatic jargon for intense, secret talks to present a deal at the end of it. If the two sides were to announce such a 'tunnel' on Friday, that would be an incredibly positive sign.

The Euro

EUR-USD is higher this morning with "risk-on", but its gains may have been held back somewhat by ECB rhetoric. At a conference in Italy, the ECB's Ignazio Visco said, "the euro's recent strengthening is worrying us because it generates further downward pressures on prices at a time when inflation is already low."

Ringgit

The Malaysian Ringgit is trading stronger today, supported by a weaker but improving global risk sentiment triggering a weaker US dollar. At the same time, higher oil prices round out the trifecta of bullish delights. Still, the bullish view is probably getting held back by yesterday's worse than expected trade numbers, the constant cloud of political uncertainly and possible market de grossing ahead of China’s Golden Week when liquidity typically dries up. 

Gold 
 
Gold appeared to put in a good a base around $1,850 after a reasonably negative September, with the metal averaging a 1-2% move lower during the month in the past five years. It’s now down almost 5% on the month, and at slightly more compelling levels to enter into longs, given positions are much cleaner than even after last month sell-off. 
 
Gold is up on a weaker US dollar, and more gains could be in the offing as focus shifts to US elections, political uncertainty and geopolitical risks. 
 
After being mercilessly hammered lower last week, gold found some decent traction, buoyed by the USD's retreat. The bounce in risk appetite is a combination of banks higher and some optimism about US fiscal stimulus, which is excellent for gold as it adds another layer of debt on to the burgeoning US twin deficits. 
 
There was a geopolitical component to gold's rally too: fighting erupted on Sunday between Armenian and Azerbaijani forces over the region of Nagorno-Karabakh.
 
Gold is especially sensitive to EUR-USD movements. EUR-USD rallied, but gains so far have limited by ECB rhetoric, which could cap golds recovery if the EURUSD stays below 1.1700.