Heading into the home straight

The final week of campaigning in the US elections, and the never-ending saga of a US stimulus package are likely to dominate financial markets this week, to the exclusion of all else. Joe Biden's lead has shrunk slightly in national polls but is holding steady in many of the swing states that will deliver victory to either candidate. One factor that may yet play out is that 56 million American's have already voted, meaning that changes in the polls this week may not be as talismanic as in elections past.

The real US election, that for the US Senate; remains too close to call, with at least nine states up in the air. For the Wolves of Wall Street, a Biden presidency and a Republican Senate would arguably be the best of both worlds. Simultaneously repairing America's international relations while reigning in the worst of alleged Democrat profligacy. In the short-term, it is likely to cause some speedbumps in the buy everything trade.

The US stimulus talks continue to drag on with both sides accusing the other of moving the goalposts. Markets have taken the rapidly fading pre-election package hopes in their stride, assuming that something will come soon after the election. With the new Senate not starting work until early January, and the new President until mid-January, that maybe ambitiously optimistic. The lame-duck period between new administrations could be anything but this time around.

Financial markets continue to price in a "blue-wave' victory and a US stimulus deal. Given the possible permutations over the US elections, let alone stimulus negotiations, a lot must go right for that to happen. History teaches us that life is not so linear and predictable. Therefore, I continue to believe that reality will strike home this week, and a reduction in risk positioning will characterise it. That should see the US Dollar outperform along with other haven currencies. Equities should ease, and gold should rally. That said, golds technical picture is ominous this morning, so perhaps it is I being too linear.

Elsewhere in the world, China's leadership group begins today until Thursday, its annual plenum to plan its next set of 5-year plans. Given the past four years of the US administration, China is already a winner with Washington DC unable to come up with a 5-day plan, let alone a 5-year one these past four years. Much speculation will abound as to what China's plans will be. My tuppence-worth will be micro-processor self-sufficiency, further internationalisation of the Yuan, a pivot to renewables and a lower annual GDP target.

US GDP should show a 30%+ rebound in the mid-week for Q3. That will be a peace dividend rebound from the shuttering of the US economy in Q2. Sans any fiscal stimulus, that every Federal Reserve Governor has been screaming for, consistent gains going forward will be harder to maintain. 

The White House appears to have unveiled its Covid-19 strategy this morning, with cases hitting record highs across the country. The White House Chief of Staff told CNN that the US was not going to control the pandemic and they were looking at vaccines and therapeutics instead. Saying this in an election week may not be intelligent campaigning, but the US is certainly not alone in putting everything on black 13 for a vaccine by years end. Mitigation, while hoping for the best on the vaccine front, or as I call it, growth over graves, is an increasingly common strategy. In the meantime, try not to be old or weak.

Europe continues to be a concern, with Covid-19 cases rocketing and Italy and Spain enacting sterner national restrictions. The UK's restrictions meanwhile have seen regional leaders in open warfare with the central government. The ECB will be watching the potential "double-dip" with concern, and it may force its hand into more quantitative easing. Thursday's rate decision will be unchanged (rates are negative anyway), but the odds of more QE have probably risen above 50%. That should cap Euro's gains this week with any new QE likely to move it to the lower end of its monthly range.

Malaysian politics, two words that go together far too smoothly, was prominent this weekend. The Malaysian King declined the government’s request for an official State of Emergency. In rejecting the application allowing the government to rule by decree without the need for Parliament to sit, including passing the much-delayed budget, the King also rebuked Malaysia's politicians. In a thinly veiled warning, he basically told them all to stop jockeying for power and get on with running the country and lifting it from its recession. Elvis Presley may be the King, but the world needs more Kings like the King of Malaysia. That hasn't been enough to lift local markets though, the FKLCI fading by 0.70% today as fears of the government's stability persist. 

The day's data calendar is bereft in Asia, with the highlights of the session likely to be German IFO this afternoon, followed by US New Home sales this evening. With Hong Kong away today, activity will remain light in Asia as financial markets continue to be wary of headline induced spikes in volatility from Washington DC.

Equities fade in Asia

Asian markets opened slightly higher this morning as the weekend passed without incident. That rally quickly faded though with major bourses easing into the red, unable to ignore the sharp falls on US equity index futures this morning. That followed a non-descript finish to the week by Wall Street on Friday.

Record cases of Covid-19 in the US, a lack of stimulus progress and pre-election nerves have seen the S&P 500 e-minis retreat 0.65% this morning. The Nasdaq 100 futures have fallen 0.55%, with Dow Jones futures falling 0.75%. That has dragged Asian markets of their initial positive starts, with the Nikkei 225 now down 0.10% and the Kospi down 0.40%. China's Shanghai Composite is 0.60% lower, and the CSI 300 is down 0.30%.

Singapore has fallen 0.15%, with Kuala Lumpur down 0.75% on political nerves and Manilla down 0.25%. Taipei is clinging on to a 0.20% with Hong Kong closed for a holiday. Australian markets are flat after rallying initially.

With so much event risk on the horizon this week, I feel that sustained gains will be hard to come by for equity markets unless a US fiscal package magically appears. Investors are far more likely, in my opinion, to take risk off the table ahead of November the 3rd. 

The US Dollar recoups Friday's losses

The dollar index fell 0.20% to 92.78 on Friday in a directionless session. No weekend breakthroughs on US stimulus proposals have seen the dollar index recoup those losses in early Asia today. The US Dollar is stronger across the board, notably against the AUD, EUR and YEN, where it has climbed by over 0.20%. 

The greenback has also edged higher versus regional currencies, with USD/CNH climbing 0.15% to 6.6770, with the onshore USD/CNY steady at 6.6860. USD/MYR has edged 0.15% higher to 4.1610 as Malaysian politics adds another gloomy shadow to the currency. 

Overall, though, activity is muted, especially with Hong Kong away today. In the bigger picture, currency markets remain in range-trading mode despite the US Dollar gains this morning. In the case of Asian currencies, most have booked decent gains over the past few weeks, even the Indonesian Rupiah, and appear to be consolidating those advances.

Although I expect regional Asian currencies to outperform into the year-end, and for the US Dollar to fall materially in 2021, further gains may be harder to come by this week. US election noise will increase as the week moves on. If the polls shift to an inconclusive result, particularly in the US Senate race, we are likely to see further risk reduction by investors into Monday. That should benefit the US Dollar and possibly the Japanese Yen as the week progresses. 

Libyan production sends oil South

The volatile range-trading in oil contracts continued into Friday, with oil giving up all of its Thursday advances in unceremonious fashion. The chief culprit was Libya, where the national oil body lifted all its Force Majeure's and ramp up production to 1 million barrels per day in the next few weeks. That headline immediately sent oil lower, Brent crude falling 1.75% to $41.65 a barrel, and WTI falling 2.15% to $39.70 a barrel.

A stronger US Dollar this morning and possibly some stop-loss selling action has seen both contracts reset lower again. Brent crude and WTI falling 1.45% to $41.10 and $39.15 a barrel respectively. Ominously, both contracts have broken weekly support, triggering stop-losses and leaving the technical picture for both looking very ominous.

Brent crude broke through $41.45 a barrel which now becomes resistance. More importantly, it is testing its 200-day moving average (DMA) at $41.15 a barrel. A daily close below here this evening would be a very negative technical development, suggesting deeper losses to long-term support at $39.00 a barrel.

WTI is flirting with support between $39.00 and $39.20 a barrel as I write. A daily close under this region sets up further losses to its 200-DMA at $37.55 a barrel. The day's opening price at $39.70 a barrel is initial resistance.

The return of just one million barrels per day of extra production to the world market has sent oil into a tailspin. It highlights how fragile sentiment is to the supply/demand balance of oil in international markets. A double-dip recession in Europe will add to the demand concerns. The scheduled increase by OPEC+ of two million bpd in January is likely to be in jeopardy if Brent crude prices stay at these levels. I would argue though, that Brent crude will need to fall under $35.00 a barrel for OPEC+ to look at rolling back production increases thus far altogether. 

With risk-sentiment likely to turn South this week ahead of the US election, oil will remain a sell on rallies and will be acutely vulnerable to further losses unless OPEC+ makes some soothing noises. 

Gold is threatening to break hearts

Maybe the Halley curse for gold has struck again, with gold failing to break out on the top side of its symmetrical triangle on Friday. Gold fell just 0.10% to $1902.50 an ounce on Friday but has dropped another 0.20% to $1898.50 an ounce this morning. 

Because of range-compression within the triangle formation, that has left the base of the triangle at $1899.15 an ounce this morning. With gold failing to break out of the top of the triangle last week, failing at $1931.00 an ounce, a move through its base today is a worrying development to the bullish outlook. The price action raises concerns that the market is heavily long into the US election on "blue wave" and US stimulus hopes, increasing the odds of a culling of positioning this week. 

A move lower through the 100-DMA at $1883.40 an ounce would almost certainly confirm this view, and likely bring stop-loss selling to the market. The technical picture called for a $100 an ounce move, depending on which way the triangle broke. That move targets around $1800.00 an ounce now on the downside. Although my baseline view was that gold should rally on risk hedging into the US election, there is a real possibility of a significant downside detour first.