Is the FX market forecasting a stock market catastrophe?

Outlook:

We get the flash PMI in the US today, likely a reprise of the "two-speed economy" the Markit chief economist named in the eurozone. Manufacturing will likely rise (from 53.1 to 54.5 according to Bloomberg) and services will likely fall from 55.0 to 54.5.

Writing of the eurozone PMI's, Bloomberg claims recovery momentum has stalled. See the chart. We guess it's too early to say that, and it will be too early to say it about the US, too, but that doesn't mean it won't become a key symbol of rising anxiety.

Of lasting significance is Fed chief Powell speaking (again) to Congress to repeat his plaintive cry that a new fiscal initiative is desperately needed. In Canada, the Parliament returns and is expected to deliver another initiative. Canada has consistently outperformed the US in containing the pandemic and is now outperforming in managing the economic fallout.

The FX market is in a state of confusion. We are not quite sure whether the dollar went up because the stock market went up, counter-intuitive when it's more typically bad news that drives the dollar as a safe-haven these days, or some chart pattern that spooked the dollar-buyers. We note above that a shocker was the appearance of a bearish harami candlestick on the USD/CAD chart that usually foreshadows a dollar pullback, a day late for the "Tuesday pullback." Sure enough, overnight the dollar slid against the CAD and also the Swiss franc, only to recover so far this morning. Fresh short-term sentiment extended to the euro, which rose from 1.1670 to 1.1719, or the "normal" 40-50 points. What's noteworthy about this event is that it has no known rhyme nor reason. It may well be a last-gasp effort by the bulls who now see they need to throw in the towel and get on board the train.

As we all know, sentiment can overpower fundamentals even when it's the fundamentals that are supposed to the source driving sentiment. When sentiment gets divorced from fundamentals, even a fundamental that calls for risk aversion to drive a currency upward (perversely), the market becomes chaotic. That's until a new narrative emerges, or we go back to the pre-existing narrative, in which case an abnormal, unexplained move is just a burp.

So the question now is whether we just burped or something new is on the horizon. Some analysts wonder if the US election is not that "new thing." But markets don't like to trade on politics unless it's something existential like Grexit/Brexit. We are more inclined to think the FX market is reconsidering the relationship of the dollar to the S&P, which by any measure is overbought and possibly topping out. In case you forgot March, see the chart. Nobody expects a drop this time on the same scale as March, but a possible drop to the 200-day moving average (green) is not out of the question. Now remember what happened to the euro then. It went from 1.1355 (March 2) to 1.0637 (March 16) and then recovered to 1.2011 (Aug 31).

Might we expect roily FX again and then a euro recovery? History repeats. Maybe the FX market is forecasting a stock market catastrophe. Just a thought.

US Politics: Republican Senators decided to exercise their power while they still have it and go for whatever choice Trump makes for a new Supreme Court justice. Some Republicans who were going to defect might come back for this reason alone, but some Dems and undecided (who can possibly be undecided?) may be inspired to swell the ranks for this reason alone. New Court decisions include the Republicans trying to bring down Obamacare and that got out the vote in 2018, and then there are guns and civil rights. The Republican have a majority in the Senate but because of the cockamamie way we allocate seats, they do not represent a majority of voters—nor does Trump.

Upset and offended over Trump calling military service for "suckers" and those who get killed "losers," the widow of John McCain endorsed Biden. Cindy McCain noted he's a decent man who understands service, having a son who fought.

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