Markets Outlook: Waxing up for the Blue Wave?

Market highlights

• In a big week of economic data releases, a potential “Blue Wave” looms largest
• USD index remains under pressure after printing fresh YTD lows
• ECB’s foot stamp could be felt this week on the Euro
• Something smells fishy with the GBP and Brexit talks
• If you’re in the oil game, best play with patience

Though this week's economic calendar features several important data releases – including the advance Q3 real GDP print – most market participants are likely to be closely watching developments in Washington as we enter the home stretch of the November 3 US Presidential election. 

The data calendar kicks off on Monday with September's new home sales, which should put in another bumper performance on a combination of pent-up demand, supported by historically low mortgage rates that should in turn provide a long runway for home builders/buyers over the coming quarters. 

Tuesday's durable goods orders and Wednesday's "advance goods trade balance reports" will be the plate warmers to Thursday's initial Q3 real GDP print.

And Friday could be a keen day for gold traders with personal income and spending released, which will also include the latest reading on the core PCE deflator – the Fed's preferred inflation metric.

Sadly, global Covid trackers continue to flash red, which will continue to be the pallbearer for oil prices over the near term.

Currency markets

Forex

As we head into the last lap before US elections, the USD index remains under pressure, printing fresh YTD lows earlier this week – an echo of biggish pricing for a Blue Wave election outcome. In particular, the market is heavily focused on significant Blue Wave fiscal spending.

Macro and asset managers added to USD shorts, but without a considerable concentration in a single pair. There was a massive uptick in USDRUB downside interest, and USDCNH downside interest broadly persists. I’m guessing at this point RUB is the second-most active EM long, with CNH still in pole position.

The USD downside bias elsewhere has slowed. Brexit optimism remains, but is primarily hedged via downside EURGBP. There was some topside interest in the EURUSD due to the reserve manager's EU bond-buying splurge last week, but even Friday's PMI bounce wasn’t overly consumed as that was more about short Euro trades getting squeezed. It doesn’t portray a market where traders are tripping over themselves to dump the dollar at this point. 

And at the heart of the Forex market lies the most aggressive team of Blue Wave playbook busters; although their ranks have been greatly diminished over the last five years, they could still be a force to be reckoned.

The Euro 

Post-election pump, I’d expect traders to pivot to early-stage developments around the threat to the European growth story, the explosion of Covid in the continent, and the worrying economic effects from increasingly stringent lockdown measures. Given the current deflationary outlook, the ECB will undoubtedly consider dropping rates to provide more accommodation to the markets into year-end. 

A convincing Democratic sweep of the US election on November 3 should lead to a lively bounce in risk sentiment. However, the rapid acceleration in new Covid cases across Europe suggests this optimism may not last. 

The Pound 

Fridays GBP move higher quickly ran out of steam following the Brexit-positive headlines, indicating France is preparing to compromise fisheries in Brexit talks. On the one hand, fishing is likely to be the least difficult of the remaining hurdles to clear, so the GBP fade is understandable. The headline algos might have liked what they saw as the savvier trader sold into the rally. 

On the other hand, there’s a decent list of negatives piling up for the UK. The market is positioned for a positive result from Brexit, so there will be very little new information or a positive surprise factor at this point.

So, given the ongoing negative rates debate at the BoE and the miserable reads on the latest PMI, GBP risk is asymmetric to the downside post these Brexit talks – regardless of the US elections.

Stocks 

The US election trade for a Democratic sweep started when President Trump contracted Covid-19 – stocks were down on corporate tax fears and then recovered on expectations for a more massive eventual stimulus. Oil was down on expectations for unattractive oil and gas policies and recovered on stimulus expectations, while bonds bear steepened on likely higher fiscal deficit spending. 

But before boarding the stimulus cash boats, investors need to fight off the mind games as they continue to ask themselves if they’re being too cautious ahead of the US election.

Joe Biden's clear lead in the polls has forced them to consider whether they may miss the move if they wait any longer. The market always seems to go to the maximum point of pain before that realization sets in.

From here, the question is whether the "Blue Wave" rolls this week?

In US equities, intraday index choppiness is a testimony to heightened nervousness and a lack of liquidity. Price action is reflationary with rates higher, dollar down, and cyclical/value equities outperforming. 

The reopening trade exceeds despite rising Covid cases and hospitalizations, suggesting that vaccine hopes are still a big market driver. Yet, for concerns well beyond oil markets, it is significant to watch for further mobility restrictions near term as those could be a real wet blanket for stocks. 

There’s been a broadening of leadership as cyclicals outperform for the month to date. Big Tech has shrugged off regulatory pressure so far, but investors will need to keep this on the radar. There’s also been an overall muted reaction to good earnings, implying moves and expectations are too high. Next week sees many earnings reports with AMZN, GOOGL, AAPL and FB all must-watch names.

Volumes have been anemic, so I’m not sure if much trafficking/de-grossing has occurred yet.

Big Tech in the crosshairs

US tech stocks have been showing signs of fatigue of late amid rotation in US equities with antitrust cases against Big Tech and concerns over what Biden's US tax plan might mean for the companies weighing on sentiment. I would flag the Financial Times headline: 'Google antitrust case backed by rare Washington consensus.' as a good weekend read.

Covid-19 vaccine trial resumes in US

Federal health regulators have decided to allow the resumption of US studies of a leading Covid-19 vaccine candidate from AstraZeneca and the University of Oxford, according to a person familiar with the matter and materials reviewed by The Wall Street Journal.

Gold Markets

It was a frustrating week for gold investors who were caught between the desire to buy on the inflationary stimulus impulse but getting anchored by higher US yields.

Gold struggled a bit and gave back all the gains after some of the positive-sounding US stimulus headlines earlier in the week. There seems to be a bit of risk reduction taking place ahead of the US election on November 3, but I think the fear of the wrong poll syndrome might clear up a bit this week, and the path higher could open up a bit. 

Oil Markets

If you have patience, stay in the game. If not, get out as it will take a lot of discipline and risk management to hold your longs in low liquidity whippy markets; even my colleagues that are decades in the game are hunkering down.

After the market took a total misread to the JMMC, oil prices have recovered but have hardly taken flight. The committee is merely buying time to better understand the demand implications from the second wave of Covid-19 infections before making any decision.

Amid tightening lockdowns, European mobility has seen oil trampled, which is reflected in softening diesel and gasoline cracks. In the US, demand strength remains virtually impossible to gauge, with data still a mishmash of supply and demand devastation from the multiple hurricanes. However, mobility data seems to be holding up.

Still, the omnipresent fear of US legislated lockdowns under a Biden Presidency will hang like a dark cloud over oil markets, as will his party's anti-fossil fuel stance.

India and China's demand has surprised to the upside. Moreover, notwithstanding "the on again off again US pre-election election stimulus romance" and gridlock in Europe over the recovery-fund spending, the aggressive Covid-19 outbreaks in the West likely mean that fresh stimulus has a higher chance of taking shape. These measures could probably carry oil into year-end, offsetting some of the slack in winter oil demand. 

From here, OPEC+ decision forks are relatively straightforward; if demand contracts and the price/curve deteriorate further, OPEC+ might choose to delay (not cancel) the two mbd tapering decision to April 1. If demand growth stalls, rather than pivots lower, OPEC+ might opt to wait to taper by a month to get a better read on markets. However, OPEC+ will not make deeper cuts unless there is unequivocal proof that global demand is contracting, which could only occur if draconian lockdown style measures get reintroduced in major oil consumption economies.