Blue Wave Hits Stimulus Reef | Daily Market Commentary with Jeffrey Halley
The “blue wave” stimulus trade hit a reef overnight, as another night of no progress on US stimulus talks tested the conviction of investors. The effects were most noticeable on US equity markets which finished deeply in the red, sucked out to sea by the receding blue wave. The surge in Covid-19 cases around the world, notably Europe, has also sapped confidence, increasing fears of a “double-dip” scenario.
I would expect the rest of the week to now be characterised by much of the same. A reduction of risk as investors belatedly reduce exposure ahead of the US election on Tuesday. That should see equities remain heavy, even if US big tech earnings this week remain impressive, which I expect them to do. The US Dollar should also benefit along with other haven associated currencies, and interestingly, gold rose overnight, detaching itself from the US equity sell-off. Although ranges remain very compressed on gold and silver, with a large breakout soon to happen, gold’s resilience overnight suggests that haven positioning is increasing.
As I have stated ad nauseam, the “blue wave” trade is premised on a complicated series of events going just right. Life is usually not that simple. In a nutshell, Joe Biden must win handsomely, and the Democrats must win the Senate in the same manner with no close results leading to contested election results. Those would then likely, end up in front of a conservatively lop-sided Supreme Court. I personally though US courts were apolitical, but apparently not when it comes to interpretation. This last thank you gift from the Republicans may yet play its part.
Spread betting on the US Presidential and Senate elections indicates key races are much closer than the polls suggest. That is often the case and a mitigating factor this time is that according to the US Election Project, nearly 64 million American’s have already voted. I note, however, that the state heat map shows early voting has been light to medium in many swing states, Florida and Texas excepted. Votes on the day will still play their part and explains why both US Presidential candidates are campaigning hard in those states.
Although Mr Mnuchin and Ms Pelosi’s teams are edging closer to stimulus deal, markets are completely ignoring the fact that it has little to no chance of making it through the US Senate. Even if the Democrats sweep all before them next week, the incumbent US Senate and Presidency remains in place until January. That time is typically used to clean out offices and hand out pardons, but, well, I don’t have to explain.
So even if big tech, starting with Microsoft today, outperforms; and a stimulus agreement emerges this week, there is a potentially big mess coming next week. Any knee-jerk equity rallies are likely to be that, temporary spikes, especially as the street has been fully positioned for it for some time. Rather than betting the house on a “blue wave,” the only thing I am sure about is that volatility will be moving higher as the week progresses. There will be no shame in heading to the side-lines for the next week or two.
Ant Financials’ IPO was priced at the very top end of expectations at $HKD 80, with the book to close a day early due to demand. The stock is scheduled to start trading in Hong Kong on November the 5th, hopefully after the US election dust has settled. If it hasn’t, all those retail buyers on 20-1 leverage in Hong Kong could be in for an emotional wait for the start of trading. Those hoped-for leveraged easy profits may well be elusive as well.
China’s Industrial Profits (YTD) YoY for September fell by 2.4% this morning. That is an improvement over August’s -4.4% drop but has likely disappointed the markets somewhat. Any lull though is a temporary one, with China data elsewhere continuing to star globally. Far more important will be China’s official PMI’s, released inconveniently, this Saturday, followed by the Caixin PMI’s next Monday. Both should steady the ship although the outlook may be dimmed going forward if Europe runs out of steam on a Covid-19 second wave. The Yuan should continue to outperform, boosted by inflows to Chinese bonds and equities, although it will not be immune to pre-US-election Dollar strength.
Tonight’s US Durable Goods data will be the day’s highlight, with orders expected to rise by 0.50%. US data of late has also outperformed but swamped in stimulus and election noise. With the White House Chief of Staff admitting yesterday the administration was all or nothing on Covid-19 vaccines, as opposed to control after a year of trying (or not), this could be peak post-virus (or not). Exploding Covid-19 infections across the country could yet dent the American fourth-quarter comeback. Looked at in conjunction with Europe’s situation, there are severe threats to the consumption side of the global recovery. For all the talk about China, it is essential to remember when America gets Covid-19, the rest of the world gets sent to the isolation facility. In this respect, I hope I am completely wrong, but I would hold off getting bullish for oil, and energy and airline companies for a while. I will happily miss the bottom of that trade.
Wall Street Sinks Asian Equity Markets.
Wall Street endured one of its worst session in recent times overnight, as election jitters and the US stimulus impasse caused markets to blink that are heavily positioned for the “blue wave.” The S&P 500 fell 2.35%, the Nasdaq fell 2.05%, and the Dow Jones fell 2.28%. The after-market US index futures have eked out tiny gains this morning on profit-taking, but that has not been enough to stop Asia following Wall Street into the red today.
The Nikkei 225 is 0.40% lower, with the Kospi the region’s outperformer, down only 0.10%. The Kospi’s outperformance is likely due to respectable advance GDP numbers today. China’s Shanghai Composite is 0.40% lower, and the CSI 300 is 0.15% lower.
The news is not so good elsewhere in Asia with Singapore 0.65% lower and Hong Kong down 1.30%. Australia is the regions worst performer today, the ASX 200 and All Ordinaries have fallen 1.80%.
Asian markets are benefiting from not buying so enthusiastically into the US stimulus trade as Wall Street. But with Covid-19 crushing European equities, and a re-pricing of risks now occurring in the US, Asia will not be immune. I continue to expect that risk will be taken off the table as the week progresses, meaning that rallies will be short in duration, with risks skewed to the downside.
Risk-aversion boosts the US Dollar.
The overnight theme was definitely one of risk reduction, with US Treasuries rallying and the US Dollar rising. The dollar index rose 0.30% to 92.74 overnight, with the Euro a notable underperformer. EUR/USD fell 0.40% to 1.1810 overnight, as markets unwound stimulus trades and Covid-19 running rampant across the continent raised fears of the dreaded double-dip. The Canadian Dollar found itself guilty by association with the US, falling 0.70% to 1.3215 versus the greenback.
Despite all the noise overnight, in the bigger picture, most G-10 currencies are now parked in the middle of their 2-month ranges. The exception being USD/JPY, where Yen repatriation flows still threaten a test of 104.00 in the coming week. Further US Dollar strength is to be expected this week as nerves over the US election and stimulus increase, and pro-cyclical trades are reduced. Fellow havens, the Japanese Yen and Swiss France should outperform their peers though, with EUR, AUD, CAD and NZD the most vulnerable.
In Asia, the story is somewhat different. Asian currencies continue to outperform Korean Won moving to 18-month highs again today at 1127.00, and sure to prompt more heavy selling intervention by the central bank. USD/CNY has moved higher to 6.7000 in the past few days but is only modestly of its recent 6.6500 lows. The Philippines Peso, Singapore Dollar, Malaysian Ringgit and Thai Baht all remain at recent highs or close to them.
The positive China story and a strong Yuan are clearly the sources of most of Asia’s currency strength, with their high beta to the regional giant. Economic data continues to surprise to the upside as well, with Singapore’s Industrial Production yesterday climbing an impressive 24.2% YoY in September, boosted by pharmaceuticals and electronics exports. Asia will not be immune to a slowdown in Europe and the US, but China’s outperformance continues to isolate the region partially. I continue to expect outperformance by Asian currencies in 2021, although they will almost certainly see some risk reduction pressures this week ahead of the US election.
Oil remains unloved but could get a Zeta boost.
Oil endured another torrid overnight session, with both Brent and WTI crushed as fears increase of a double-dip recession in Europe. Brent crude fell 2.90% to $40.45 a barrel overnight, with WTI falling 2.90% to $38.60 a barrel. With Covid-19 rampant across America and Europe, the 2021 consumption picture is becoming cloudy, complicated by the planned 2 million barrel a day increase by OPEC+ in January, and the return of full Libyan production. Markets entirely ignored new sanctions on Iran oil companies overnight by the US.
Profit-taking on US Dollar longs from overnight has seen greenback edge lower in Asia, giving oil a short-term boost, with both contracts rising 0.55% to $40.70 and $38.75 a barrel today. Hurricane Zeta is due to make landfall in the US gulf states later tomorrow and may also be providing some price support. As of now though, it is merely a Level-1 hurricane, and unlikely to materially affect US oil production and refining. Its effects, if any, are likely to be transitory.
Oil’s price risks remain skewed to the downside, despite the scale of the sell-off of the past two days. Brent crude carved through its 200-day moving average (DMA) at $41.15 overnight. It now becomes resistance followed by the $41.40 a barrel region. The overnight low at $40.25 a barrel forms initial support, with nothing until $39.00 a barrel after that. WTI has resistance at $39.20 a barrel with support at overnight low at $38.30 a barrel, and then its 200-DMA at $37.45 a barrel. Both relative strength indices are neutral, meaning that oil’s downside is in no danger of becoming oversold.
Although OPEC+ will be looking on with concern, I believe it will take a sustained break by Brent crude of $35.00 a barrel to force their hand to roll back production increases. Much will depend on Europe’s Covid-19 battle in the coming weeks.
Gold’s price action shows strength.
Both gold and silver have been slowly compressing their daily ranges in symmetrical triangles these past two-months, implying that large price breakouts are coming. Overnight gold survived a test of the downside of the triangle at $1899.00 an ounce, rallying even as equity markets fell violently and the US Dollar strengthened. Gold finished unchanged at $1902.00 an ounce. The fall in US Treasury yields will have helped, but there was an undeniable durability in gold’s price action overnight. It suggests that US election risk-hedging is starting to pick up momentum.
Gold has rallied again in Asia, rising 0.30% to $1908.00 an ounce. The top and bottom of the triangle today are at $1924.00 an ounce, and $1902.00 an ounce respectively. The 50-DMA at $1919.60 an ounce, and the 200-DMA below at $1885.00 an ounce provides interim support and resistance.
With gold’s and silver’s ranges compressing ever tighter, a breakout by both is likely only days away. The author’s view is that pre-election risk hedging, and the possibly tumultuous days after, means a large upside move is the more likely. Longer-term readers may look at my track record as a leading reverse market indicator though, and just accept that a large move is coming, ignoring my directional thoughts. I don’t blame you; market intelligence comes in all forms.