Biden victory imminent, Yields pop on strong NFP report, Dollar outlook, Oil lower on virus concerns, Gold’s bullish outlook is back, Bitcoin eyes record territory

It appears Joe Biden rebuilt the blue wall, nearing comeback victories in Pennsylvania and Georgia, this election will get called shortly.  A long drawn-out legal battle has been signaled by President Trump, but with no credible evidence of voter fraud and a massive defeat with the remaining states, a contested election will likely not change the impending result. 

After much of Wall Street began to embrace the idea of a Biden presidency with a divided Congress, the call for the Republicans to keep the Senate may have been premature.  Both sides have 48 seats, with the Republicans needing to win three of the remaining four races.  Republicans should win Alaska and North Carolina, with Georgia producing two runoff elections that will occur on January 5th.  Democrats would need to win the two seats in Georgia to get to 50 seats, which would give VP Harris the tiebreaking vote.  It still seems unlikely for the Democrats to pull a Senate comeback, but Wall Street might grow nervous in completely pricing out a ‘blue wave’.  

US stocks had a rough start to the morning as investors accepted the harsh reality that coronavirus spread in the US will bring back lockdowns that will cripple economic activity for the rest of the year.  With new cases coming in over 100,000 per day, some health experts anticipate it might only take a few weeks to double.  Lockdowns are likely as daily cases could surge to 500,000 if we see no change in policy.  

NFP 

A solid NFP report tentatively helped stocks pare losses as the labor market recovery continues despite any help from Congress.  The nonfarm payroll report was very positive except for the 3.6 million people that have been out of work for 27 weeks.  Almost one-third of the unemployed are permanent job losses so that should keep the pressure on Congress to do something.  Congress will likely act sooner as the return to coronavirus induced lockdowns will disrupt the labor market recovery.

The nonfarm payrolls increase of 638,000 was better than the consensus estimate of 580,000 and slightly lower than revised prior reading of 672,000.  The unemployment rate improved to 6.9%, alongside a larger-than-expected increase with participation rate.  

Up until now, the labor market recovery outperformed everyone’s expectations, but the imminent COVID-19 shock to the economy is sounding the alarm.  

FX/Treasuries

Treasury yields jumped following the strong NFP report, with the 10-year yield rising 6.2 basis points to 0.825%.  The US economic recovery is battling the current virus surge, but optimism is high that a Biden presidency will help squash the virus spread once he is in office. 

The dollar is stuck in election mode, bouncing back after President Trump signaled he is not done fighting.  The dollar rebound that stemmed from Republican upset in the Senate appears to be fading.  The reflation trade is not completely dead as Biden's administration will only have to win one or two votes to get some of his economy friendly initiatives passed through.  The dollar however will likely remain under pressure because the Fed will have to cover any shortfall from Congress in support for the economy.  

Oil 

Crude prices declined as COVID-19 worries intensified in the US.  The virus is raging across the US and Europe, raising prospects for lockdowns and restrictive measures.  The demand outlook is going to get a lot worse for the holiday season and that should force OPEC+’s hand in delivering deeper production cuts.  

Optimism is still very high that in the next couple of months that at least a couple of vaccines will get the greenlight.  The US dollar outlook for the next year is for softness and that should provide some underlying support for oil prices. 

WTI crude seems very vulnerable in the short-term, but optimism over vaccines/treatments and a softer dollar should prevent any massive selloffs.    

Gold

Gold is steadying after having the biggest weekly gain since July.  Gold seems poised to make a run towards the $2000 level after Fed Chair Powell’s cautions tone on the economy raised the prospects that the Fed will be providing more stimulus.  The Fed discussed options for modifying their asset purchase program and that should allow them to adopt yield curve control in December.  

The COVID-19 spread across the US will force a return to lockdowns and make Congress deliver at least a $1 trillion dollars in stimulus by December.  The stimulus trade wave won’t be as big as many anticipated but it should still help gold break the October trading range.  

Bitcoin 

Bitcoin’s return to record high territory doesn’t seem like a tall order anymore.  The bullish case for cryptos is being led by growing mainstream interest, as central banks begin the journey into going digital, and as macro traders buy up risky assets after the Fed cemented the fate for the dollar.  

Bitcoin is tentatively seeing some resistance ahead of the $16,000 level, but still has potential in the short-term to target the $17,500 level.